Ventas, Inc. (VTR) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Ventas earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Juan Sanabrial. Thank you. Please go ahead, sir.

Thanks Justin. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the fourth quarter and full year ended December 31, 2019. As we start, let me express that our 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 law. 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, 2018 and the company's other SEC filings. Please note the quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure as well the company's supplemental disclosure schedule are available in the Investor Relations section of our website, www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thank you Juan. Good morning to all of our shareholders and other participants and welcome to the Ventas year-end 2019 earnings call. Today, the Ventas team is here with me to discuss our 2019 performance and provide our outlook for 2020. Let me start by expressing how personally committed I am to the future success of Ventas, our Ventas team and our stakeholders. As such, today we are announcing a series of decisive actions to drive performance, including recruitment of new talent and realignment of our executive team, the launch of an exciting new growth platform and significant moves to improve senior housing quality and reliability. Following our third quarter call with you in October, we committed to doing three things. One, closing out the year consistent with the guidance we provided. Second, taking demonstrable steps to improve performance and get back on the Ventas winning path. And third, providing 2020 guidance when it was ready and reliable. Today, we have met all three commitments. Let's start with finishing our year consistent with our outlook. For the full year in 2019, we delivered solid enterprise results of $3.85 per share, at the high-end of our full year normalized FFO guidance range issued in February 2019, let by our office segment outperformance, steady growth in our healthcare portfolio, accretive investments and effective capital markets activity. Our fourth quarter 2019 results also came in line with our projection. Notably, during the year, we also made significant strategic advances. We announced, closed or commenced nearly $4 billion of new investments expected to yield between 6% and 7%. These investments include our attractive LGM portfolio and partnership in Quebec and our commitment to nearly $1 billion of high quality research and innovation ground up development projects with leading research universities. We took smart capital markets actions to finance our investments, lower interest expense and extend maturity. And thanks to Pete Bulgarelli and his team, we delivered strong results in our office business that now represents nearly 30% of our portfolio. We continue to lead in and be widely recognized for our commitment to environmental, social and governance values. Second, we promised to take demonstrable actions to improve our performance and position us for growth and success. We have been moving with a sense of urgency, intensity and purpose and have made significant strides over the past couple of months. These actions fall into three general categories, leadership, senior housing and platforms for growth. Let me start with leadership. Today, we announced the appointment of Justin Hutchens to our executive leadership team. Most of you know Justin as a well-respected operationally focused senior housing leader. Justin, who will report to me and move to Chicago, will oversee our senior living business in North America, partner with our operators and focus on maximizing our position in the market. His operating background will provide a strong complement to our existing capable team and his presence will add to our senior housing bandwidth. We are all very excited about the insights and impact Justin will have on the Ventas senior housing business when he joins us in early April. At the same time, we are realigning our current leadership team to provide expanded growth and responsibilities for each executive and we will welcome our new General Counsel, Carey Roberts, when she begins at Ventas in March. Turning to the action items to improve our senior housing business. We are marketing for sale over $600 million in non-strategic senior housing assets and the process is competitive. When achieved, proceeds of these divestitures will be recycled into our exciting research and innovation pipeline with leading research universities. We have also collaborated with our operators to accelerate and target our senior housing capital investment plans for 2020 and better position our communities to compete in their markets. In priority markets, we have significantly increased our 2020 budgeted CapEx spend, particularly on projects that are customer facing and designed to improve the occupancy, competitive position and overall attractiveness of our communities. We have also taken initial steps to form an institutional joint venture for the ESL portfolio, as ESL continues to find its footing following the transition of assets to it, the recent rollout of its simplified pricing model and an increased allocation of capital to the communities. And finally, in a sincere attempt to be responsive to investor and analyst input, we have updated our SHOP same-store policies to enhance comparability, transparency and consistency in the presentation of our SHOP results and guidance. I want to recognize Michael Bilerman for encouraging this initiative as well as Tom Herzog, Pete Scott, Bob and our own team for the energy and professionalism they brought to this effort for the benefit of investors, analysts and other stakeholders. The third category of action we have taken to position the company for growth and success is the launch of an exciting new business in the first quarter. It is a Ventas branded perpetual life vehicle focused on life science, medical assets and senior housing assets. Our fund is off to a fast start with about $650 million of committed third-party capital by its initial closing which is expected in the first quarter. Ventas is seeding the fund with life science and medical office buildings valued at a 4.9% cash cap rate validating the value creation of our investment strategy and execution. At inception, we also expect the fund to enjoy nearly $0.5 billion of incremental buying power to acquire additional assets and we expect the fund's gross assets under management to grow over time. Ventas will retain a 20% interest in the fund to ensure alignment with the fund investors as well as receive asset management fees and other compensation if the fund investors receive expected returns. Our new fund has numerous strategic and financial benefits for Ventas and its shareholders. It leverages our brand, team, experience and industry knowledge, extends our reach and provides us with another consistent source of capital to grow. We expect each of the actions outlined above to contribute positively to our enterprise results over time. Which leads to the third and final objective we communicated to you that we would introduce 2020 guidance and the components thereof when they were ready and reliable. Today, we are introducing 2020 normalized FFO per share guidance of $3.56 to $3.69. Our 2020 guidance at the mid point approximates our fourth quarter 2019 results times four adjusted for a few identified items. Our guidance also reflects our expectations for continued strength and reliability in our office and healthcare verticals, continued pressures in our senior housing portfolio and no capital markets or investment activity. Although our 2020 guidance excludes, as is typical, the impact of new acquisitions, we are coming off a fantastic year and we continue to see attractive investment opportunities across our verticals, including in our research and innovation business. During 2020, we will endeavor to extend our long history of effectively sourcing, acquiring, underwriting and financing value creating investments. Turning to the broader market, we continue to see strong institutional interest in all of our asset classes, particularly senior housing, life science and medical office. Global investors continue to be powerfully attracted to these asset classes for the same reasons we are. They are driven by powerful demographic demand tailwinds. We are especially encouraged by the favorable supply demand trends in the national senior housing market and in our submarkets that bode well for our future. In the top 99 markets, absorption in the fourth quarter outpaced inventory growth for the second consecutive quarter driving 2019 absorption to the highest level on record. Across Ventas submarkets, we expect 2020 deliveries of new communities to improve year-over-year. Although operators are still digesting the cumulative supply delivered over the past couple of years, the power of this upturn in senior housing is undeniable and inevitable. So as we push through 2020, we have our sight set on the potential in Ventas from the upside we see in our senior housing business, contribution from the opening of our research and innovation developments, steady and growing NOI from our high performing office and healthcare portfolios, the expansion of our footprint and access to capital through our newly launched fund, our enhanced team that is committed to each other and to our stakeholders and our continued investment in capital markets opportunities. And now, I am happy to turn the call over to my partner, our CFO, Bob Probst.

Thanks Debbie. In my remarks today, I will cover our property performance and outlook, our overall 2019 company results and our company guidance for 2020. But before I jump in, our 2020 FFO guidance range midpoint of $3.63 per share can be framed simply as our adjusted fourth quarter 2019 FFO annualized further adjusted for continued growth in office and triple-net healthcare, $0.03 of dilution from $1.3 billion of capital recycling and for flat senior housing performance. This guidance excludes any new unannounced fees, investments or capital markets transactions, as is our practice. With that context, let's get into the property discussion. SHOP results for the fourth quarter 2019 were in line with our latest expectations. Full year 2019 same-store SHOP NOI declined 4.4%, while Q4 declined 7.5%, driven by the cumulative effect of new competition together with some unique operational issues at ESL. If we exclude ESL, which represent 8% of our same-store NOI, fourth quarter 2019 same-store NOI would have declined 4% and the full year 2019 would have been down 3.1%. As anticipated, the lower revenue trajectory coming out of Q3 continued in the fourth quarter and occupancies finished the year at 86.3%, which is 160 basis points below prior year. On a positive note, operating expense growth was less than 2% in Q4 with labor inflation mitigated by strong cost controls, a theme which played out consistently during 2019. In terms of guidance, 2020 same-store SHOP NOI is projected to decline in the minus 9% to minus 4% range. The simple facts are that our SHOP guidance is a result of two factors. One, the revenue trends that we called out at the end of the third quarter as having an important impact in 2020 because of the lower occupancy start point entering the year. And two, the impact of cumulative supply still being digested in 2020. The fourth quarter 2019, which incorporates the lower ending occupancy levels, is a good jumping off point for 2020. Relative to the fourth quarter 2019 annualized, 2020 SHOP same-store NOI is expected to be flat at the guidance midpoint. We do expect improvement in the full year occupancy gap in 2020 relative to the 160 basis point gap in the fourth quarter 2019 as well as modest 2020 RevPOR growth, driven by healthy in-place rent increases. Wage and insurance inflation and the impact of an extra day due to the leap year are also incorporated. Encouragingly, new supply coming online in our SHOP submarkets is expected to decline nearly 15% in 2020 and new construction starts and preconstruction permits are also trending favorably. That said, we estimate cumulative new units that have come online over the last several years and that are still being absorbed will remain elevated in 2020. Thereafter the positive trends of growing demand and lower inventory under construction should become manifest. Debbie summarized earlier our action plans in senior housing. I will build on a few of those points. First, we continue to increase the frequency and depth of dialogue with our operators. The addition of Justin Hutchens with deep experience and relationships in senior housing operations will accelerate and complement those efforts. Second, we have incorporated the sale of $600 million of non-strategic senior housing assets into our SHOP outlook benefiting the same-store range by an estimated 50 to 100 basis points. And third, we revised our same-store SHOP definitions as announced last week in conjunction with and consistent with Healthpeak. The new definitions are summarized on pages 47 to 49 of our supplemental. These SHOP updates are effective January 1, 2020 and we have presented 2019 results as if these updates to SHOP policies has been in effect during the year. The impact of their adoption is to reduce 2020 same-store growth by 50 to 100 basis points by eliminating the benefit of lease-up of certain redevelopments. Taking together, the impact of the sale of certain SHOP assets and the adoption of the new definitions effectively offset each other. I would also note that over 80% of our SHOP assets are in the same-store pool and as is our normal practice, we provide transparency into both quarterly and full year same-store pools which we think is critical to understanding organic growth in SHOP. Finally, I am pleased to report that the LGM portfolio has been successfully integrated. Our partnership with the LGM team is off to a strong start and the assets are performing well. Let's turn to our triple-net lease portfolio which grew same-store cash NOI by a solid 2.2% for the full year 2019. Our healthcare portfolio of acute and post-acute assets led this growth. Within triple-net, IRF and LTAC coverage remained stable at 1.4 times. Ardent continued to perform exceptionally well throughout 2019 and Ardent rent coverage remained robust at 3.1 times. Trailing 12-month senior housing triple-net rent coverage was flat at 1.1 times but included some DRIP floor and coverage from certain operators including Brookdale. We were pleased to see the solid report from Brookdale on its earnings call yesterday. On a same-store basis for 2020 triple-net overall, we expect same-store cash NOI will grow 1.5% to 2.5% year-over-year driven by in-place lease escalations in healthcare assets. Let's discuss our exciting office reporting segment which represents 27% of Ventas' NOI. For the full year 2019, office same-store cash NOI increased by 2.6% beating the high end of our upwardly revised guidance range of 2% to 2.5%. This outstanding result was fueled by our R&I portfolio which grew 2019 full year same-store cash NOI by 6% with average rent per square foot up 5.5% and occupancy approaching 97%. Strong performance at our university-based developments, affiliated with Duke and the University of Pennsylvania, fueled growth in Q4 and the full year in R&I. The benefit of lease-up of our attractive R&I developments will continue to boost same-store growth in this segment in 2020. Complementing the fast growing R&I business is our highly valuable medical office business. MOB same-store cash NOI for the full year 2019 increased 1.6%, in line with our expectations and above the midpoint of our guidance. The MOB team did a terrific job delivering excellent customer service in 2019 and achieved a very strong 92% tenant retention rate for the quarter and 86% for the full year, a Ventas record. On a combined basis, our office portfolio of life science properties and MOB assets is expected to accelerate growth and same-store cash NOI from 2.6% in 2019 in the range of 3% to 4% for the full year 2020. This guidance is comprised of the midpoint of 1.75% and 9% for MOB and R&I, respectively. Now on to our overall company financial results. In 2019, we delivered normalized FFO of $3.85 per share, at the top end of the initial guidance range of $3.75 to $3.85 that we set out last February. For the full year 2019, same-store property results were also in line with our latest guidance ranges. We have been proactive in refinancing our debt. At the end of 2019, Ventas' average debt duration on senior notes approached eight years, our average cost of debt improved to 3.5% and our debt maturities through 2021 are minimal. Finally as expected, net debt to adjusted EBITDA was six times for the full year 2019. I will finish up with our full year 2020 guidance for the company. The key components of our guidance are as follows. Net income attributable to common stockholders is estimated to range between the $1.61 and $1.74 per fully diluted share. Normalized FFO is forecast to range from $3.56 to $3.69 per share. We expect our portfolio same-store cash NOI to range from minus 1.5% to positive 1% and net debt to adjusted pro forma EBITDA is expected to remain stable for the full year 2020. Following Q3 2019 earnings, we communicated that our implied Q4 2019 guidance midpoint annualized or $3.64 per share would be a "good start point" for our 2020 FFO per share. This calculation was before any new investments or dispositions in 2020. Our 2020 FFO guidance midpoint as published today is $3.63 per share despite absorbing an anticipated $0.08 per share of dilution from $1.3 billion of dispositions used to reduce debt and to invest behind our new R&I developments. And as is our usual practice, we have not included in our guidance any new fees, investments or associated capital markets activities. Our normalized FFO per share bridge from our fourth quarter 2019 annualized to our 2020 guidance midpoint of $3.63 can be found in our press release. To close, the entire Ventas team is fully engaged and committed to execute on our 2020 plan, to improve performance and to position us for the exciting opportunities that lie ahead. With that, I will ask the operator to please open the call to questions.

[Operator Instructions]. And our first question comes from Vikram Malhotra from Morgan Stanley. Your line is now open.

Thanks for taking the questions. I know you guys have done a lot of work. So congrats on getting all this done. So I have one question and a follow-up, just focused on guidance. Can you give a little bit more color on how you came out with the ranges for your ideal growth kind of at the midpoint? And then what gets you to either end? And how the flu may be baked into that? And then second question, on the triple-net side, you talked about coverage. I am just wondering, are you baking in any additional cuts or anticipating any cuts to the rent from the triple-net side?

Sure. I will take those and thanks for the question. Good morning. Let's start with SHOP midpoint of the range and then I will do the high-low. Midpoint of range occupancy, we expect to improve the gap year-over-year relative to the fourth quarter. The fourth quarter was down 160 basis points versus the prior year 2019 to the 2018 and we expect to improve, i.e., narrow that gap over the course of 2020. We expect modest RevPOR growth. We had nice in-place increases in the 2020 first quarter and that's helping. That will be offset in part by re-leasing spreads to get to modest growth in RevPOR. On the expense side, we highlighted some of the issues including labor inflation, insurance inflation and the extra day of leap year and those are all baked into the plan. I would say, on the OpEx growth side, we have not assumed that will continue to hold overall OpEx below 2% which is what we saw in the last few years. And when you add all that up, that gets you to the midpoint of the range that we quoted. On the, I will call it, the good side of the range, the real levers, I would say, are particularly around cost. So their ability to continue to drive the labor inflation down through efficiencies in the operating model, procurement, et cetera would be the upside that really is key to get to the good side of the range. On the other end, it's really about the revenue and pricing and what happens in the marketplace as we continue to absorb the supply that's still out there. So really, a revenue driven equation on the downside and that's really the upside-downside as we portrayed it. On the second question or I should say, the flu. Yes, the flu is incorporated. We don't believe it's a big deal this year. But it is incorporated. Triple-net coverage, a complex equation, for sure. I would say a few things. One, what we told you last year remains true, i.e. lease modification impacts transitions, et cetera and becomes 20 and 20 is the simple phrasing. That is true. That's incorporated in our guidance. We have also incorporated some room for further modification should they be necessary. And so that is in the guidance range for FFO as we look at the overall. So long answer.

So just to clarify, the SHOP guidance that you have, given you are looking to you, given that ESL may undergo a change, what would the guidance have been excluding ESL?

The benefit is baked into the range as it's not baked into our guidance. I would say, it approximates 100 basis points.

Okay. Thank you.

Thank you. And our next question comes from Nick Joseph from Citi. Your line is now open.

Hi. It's Michael Bilerman here with Nick. And Debbie, thanks for working with your peers to standardize same-store. We certainly appreciate that. Two question from me.

Good morning.

Good morning. From the fund that you launched, can you walk us through the process now of allocating acquisitions into the fund versus on the portfolio? It sounds like it's going to both core and core plus. So what's going to be the factors of an asset or portfolio of assets going to the fund versus on balance sheet?

Good. Well, we are excited about this. I have long admired Hamid and his success in this area and I am excited that we can use our infrastructure and platform to give investors a choice of how to invest in these core life science and medical office and senior housing assets. So there are defined criteria, you would imagine, for the fund and over time as the fund grows which we expect and hope that it will, there will be just really a choice of which is the better home for the assets making sure, of course, that we treat all of our stakeholders fairly.

Thank you. And then second question in terms of G&A load. I guess it's really a two-part. One, what's embedded for guidance for 2020 relative to 2019 for G&A, especially as you are bringing new people on but also taking a look 2019, you were at $166 million, call it about 50 basis points of growth asset value. Your Q closes large-cap healthcare REIT peers. You had peak running at $90 million or just over 40 basis points and well at $126 million just over 30 basis points of GAV. May be there are some disclosures in terms of comparability but just directionally, do you feel that there's areas that you can reduce the G&A load and how will Justin's hiring impact things as we look at 2020?

Thanks. I will take that one. Thanks Michael. So it's always hard to compare on G&A using different measures. Scale, your operating model are two variable that can drive material differences. As we look at our G&A, I would highlight a few things. When you look at year-over-year, for example, in 2019 we saw the lease accounting standards change where we begin to expense leasing commission costs. That is in the run rate, if you like, but a year-over-year impact in 2019 and in the base. As we look at 2020, we would expect effectively to, on G&A, try to stay flat. And thereby, by definition of absorbing headcount costs including Justin. So that's going to mean efficiencies and being sharp as we always are but that's our budget.

Well, I told him he has to make it all back times three or something.

I am sure he will pay for that. Look out.

All right. Thank you.

Thanks Michael.

Thank you. And our next question comes from Rich Anderson from SMBC. Your line is now open.

Thanks. Good morning.

Hi Rich.

How are you? Good addition with Justin.

Thank you.

Good guy, of course. Looking forward to seeing him again.

Yes. We are too.

So on the same store, I guess the question goes for both same store and FFO as the year progresses and same-store meaning SHOP. How do you vision this moving over the course of the year? Do you do you see a trough quarter on either measure? And then when you think about the work that went into identifying your SHOP guidance, is there a timeline where you get back to a more competitive level of growth versus your peers? Is it a year from now? I am sure there is something, some sort of thought about timeline to sort of get this matter all hopefully behind you.

Yes. Rich, good question. Thanks for asking. Because the profile, as you know, of 2019 was in the second half, we saw the revenue drop. We called it out, obviously, in the third quarter. They carry forward into the fourth. So if you just kind of drew a line to think about 2019, obviously it started high, finished low. And coming into 2020, that's our start point. And so all else equal, we would expect to see a tougher comp in the first half of the year and then normalizing, if you like, as we get into the back half of year. So that's just going to be the normal phasing as we look at it. And as we look at the year-over-year guidance range, that is a fundamental predicate, absolutely for sure.

Okay.

Go ahead.

I was just going to say, so is first quarter the trough here, both for same store and FFO, would you say? Is it a trough quarter?

Yes. You will have some competing forces there. So in terms of FFO phasing, the dispositions, we talked about $1.3 billion of dispositions being used to reinvest behind R&I and debt repayment will be over the course of the year. So that is dilutive because at $0.08 versus the fourth quarter. So you will see that phasing in over the course of the year. So some offsetting forces.

All right. But then, this time next year, do you think it will be at a competitive level of growth on the same store SHOP portfolio?

Everyone in this room is focused on delivering 2020.

Okay. Second question is on the fund assets. You have kind of answered it kind of. But I appreciate you want to kind of hold your cards a little bit. But is there at least a higher percentage of riskier assets are core plus assets there? And would you see more from your existing portfolio? Or is this all you are going to do for now and everything else would be growth?

Well, right now, it's our expectation that everything will be growth and importantly, we believe that it really does augment our aggregate capacity to grow. And so from here on out, we would expect John's team to be sourcing investments and if appropriate they will go in the fund and otherwise we will happily take them on balance sheet. So we are excited about the expansion of overall capacity.

I still don't appropriate is though. Can you define what appropriate is for the fund?

Yes. I mean there are defined investment criteria that are identified that would be core life science, stabilized core life science, senior housing and MOBs. And things like our growing research and innovation pipeline, ground-up development with our exclusive partner Wexford, would clearly be, for the Ventas account. So there are pretty clear demarcations but where there may be overlap, again our job is to be fair to all the stakeholders. And so in the aggregate, expand our reach and our acquisition capacity.

Okay. Wonderful. I will clear the floor. Thanks.

Thank you Rich.

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

Thanks. Just going back to the fund, I think you mentioned $500 million of incremental buying power in the funds. Can you just tell us what the leverage target is? So we just sort of have an understanding of the assets you would be buying in the funds?

Yes. It's consistent with our enterprise leverage target.

Okay. And the $500 million of incremental buying power, that was you referring to actually assets being bought at the fund level?

Well, it's equity and debt availability on top of what we are already seeding the fund with in the initial closing. And then again we would expect assets under management to grow from there.

Okay. And in terms of the additional assets, are you more likely to be buying new assets or contributing existing Ventas assets into the funds?

Right. Very clearly, from here on out, we would expect us to augment our total acquisition capacity and it would only be newly acquired assets which if they meet the criteria and are otherwise appropriate would go to the fund. So we are initially seeding it with the $500 million that we talked about and then from there it will be John's team that will be sourcing and closing the investments and if appropriate, that's how the fund would grow from here.

Okay. Thanks. Just one last question on the hiring of Justin. Maybe you could talk a little bit more about exactly what you are hoping for him to achieve? And I guess, just looking back on last year, it just felt you had kind of an issue where you were just dealing with some operator issues and in some cases, you just have to kind of live with those operating issues. I mean, going forward, how is Justin going to be working with senior housing operators where, I guess, if you have a little bit more control over ultimately how some of these assets perform? Thanks.

Good. I am so glad you asked that. And note that we did this right before the trade deadline. So we are excited about it. I mean what we really think that Justin will bring and again, we have this bias to action. We are taking a lot of actions to do what we told you which is to put Ventas back on a winning path and to realize the upside in our portfolio in our senior housing portfolio. So what he is going to do is work very closely with our existing highly capable team. He is going to bring that complementary operating background that he has that will make us better and he has pre-existing relationships with most, if not all, our operating partners, as you know. And so he can work with them and our team on operating strategies and capital plans with the overall objective, of course, to improve operating results. He will also, as we mentioned in the press release, serve on the ESL Board of Directors.

Okay. Thank you Debbie.

Thank you.

Thank you. And our next question comes from Jeff Spector from Bank of America. Your line is now open.

Good morning. Thank you.

Hi Jeff.

Good morning. I would like to focus a little bit more on hiring Justin. Congratulations.

Thank you.

Could you share with us, I guess, some of the feedback criteria that he provided to you in taking this role? Again some of the criteria he requested?

Yes. I mean one of the great things is that Justin coming here really is attracted to Ventas' team, our strong track record, our commitment to our stakeholder and the upside in our business, broadly speaking in our senior housing portfolio in particular. And he is obviously well versed in the U.S. senior housing market. He helped build the business during a dynamic time in the senior housing market and I think he is confident that he can have a very positive impact on the company and on our portfolio once he joins.

So has he already influenced the $600 million of dispositions, the non-core dispositions? Is that, you know, the bulk right off the bat? Or he still needs to come through the portfolio and figure out how much more needs to be sold from there because I am trying to tie just that? And then you still did comment in your press release that you are expecting a positive turn in senior housing and I am not sure when you feel that's coming?

Good. So we have been working on these action plans, obviously, on our own and as well as all the other actions that we outlined today. We have been full speed ahead on them. And Justin will start to make his contributions really when he comes here in April and we are really looking forward to that. And as I said in my remarks, the tailwinds of demographic demand in senior housing are compelling and the fact there will be an upturn in senior housing driven by those demographic tailwinds is both undeniable and inevitable. And so we are focused on 2020. We want to continue to take actions as we have today to position us to capture that upside and that's what we are all focused on.

Thank you.

And Justin will be focused with us as soon as he gets here. Thank you.

Thank you. And our next question comes from John Kim from BMO Capital Markets. Your line is now open.

Thank you. Just taking a step back looking at your guidance, it implies over a two year period an 11% decline in FFO and that's totaling $99 million at the midpoint, but at the same time, same-store NOI is flat. You have made $4 billion of investment. Can you just remind us what the disconnect is between those three items? I know you have a $10 million rent cut last year, but are there more rent cuts contemplated this year, just given where your triple-net coverage is?

Right. So the key variable in here you mentioned, there is dispositions and loan repayment activity, i.e. sales over the last several years, again reinvested in either debt reduction or future growth through R&I which have been dilutive to FFO. That together with the senior housing market driven performances, effectively those are the two key things that answer that question.

What about any further rent cuts or re-lease like you had last year?

Right. So again, we in our guidance have incorporated the impact of that which happened last year. So we talked about the $10 million becoming $20 million in terms of activity in the triple-net operator portfolio. That's in. And then we provided for some additional activity, if it's necessary. So we have contemplated having to deal some others. So that's in the guidance.

Okay. And then my second question is on your fund. Can you just discuss how much you are going to earn in fees this year? Is it just your typical asset management fees or if there's any origination or acquisition fees that would be included in your normal FFO?

Yes. It' just a market structure and I am surrounded by a phalanx of counsel, who is encouraging me to restrain my comments. So I will. But it's just a market structure.

So any one time fees would be basically to promote? Or would there be anything else in there?

Again, principally, again, if there's asset management fees, as you would expect and other as the documents provide.

Okay. Thank you.

Yes.

Thank you. And our next question comes from Steve Sakwa from Evercore. Your line is now open.

Thanks. Good morning.

Hi Steve.

Hi. I just want to go back, Debbie, to a comment you made early about the CapEx spend and your investing into the senior housing to help shore up the portfolio. But I don't know that you actually provided a dollar figure for that. So is there any color you can provide on that and how that relates to overall maintenance CapEx spending in 2020?

I will do overall for the company that's in the guidance. I will let Chris talk a little bit more specifically about senior housing. But the guidance range for 2020, this is FAD CapEx, Steve, is $180 million at the midpoint. Round numbers, we were $156 million in 2019. And the vast majority of that increase is a function of senior housing and again, very much a result of this targeted and accelerated spending in senior housing. So I will turn it to Chris to give a little more meat on that bone.

Yes. Great. Again, Chris Cummings, senior housing asset management. As you look at senior housing spend on a per unit basis, in 2019 we spent on a total basis around $2,500 per unit, closer to $3,300 per unit in 2020 is our expectation. We are spending in terms of customer facing capital, about 65% more dollars in 2020 than we did in 2019 and where we are spending those dollars is primarily in those markets which we view as future attractive from a supply demand perspective where we can get good outcomes from that spend.

Okay. Thanks. And Debbie, just going back to the R&I business, just in general, you know what are you seeing with Wexford in terms of the deploying new capital and how would you expect starts to trend in 2020 and maybe into 2021?

We continue to have a robust pipeline. I mean Wexford has a terrific position in the marketplace with these leading research universities. And we have a team dedicated at Ventas to work with them.

Can you just share anymore around just types of deals or the size of the pipeline or expectations on starts?

I would refer that to colleague, John Cobb.

Yes. I mean last year, we announced $1.5 billion pipeline. Today, we have done almost about $1 billion of that. So we are still working on another $0.5 billion that we think will start hopefully in the first half of this year and then we are confidently looking at new deals. They generally range between $100 million to 250 million a piece. So they are sizeable. But we have an active pipeline and we have a great market competitive position.

Great. Thanks.

Thank you.

Thank you. And our next question comes from Jordan Sadler from KeyBanc. Your line is now open.

Thank you. I just wanted to clarify on the hiring of Justin, his real marching orders here. I know you talked about sort of increasing the dialogue with operators and obviously he is on the ESL Board. But will be also be taking an overall inventory and assessment of the existing seniors housing triple-net and SHOP portfolios and assessing whether or not you have the right portfolio of assets going forward?

Well, working with Chris Cummings and our existing team, we want to partner with Justin as a team to improve performance and obviously a part of that is looking at the portfolio with fresh eyes. We believe we have a portfolio that will perform in the long term. Look at capital plans, obviously look at pricing strategy. So it's all part of the overall leadership of our senior housing business.

So it sounds like, I guess, what we are all probably trying to get at here is, what Justin's mandate is and sort of what's been relayed to him in terms of what he will be able to do in terms of needing to address whatever may be going on within the portfolio? And so you know what's the latitude in terms of capital recycling? It sounds like you are saying there will be some latitude.

Yes. I mean, these are enterprise decisions. We will all work together to optimize both portfolio and enterprise. And he will be really leading that effort with Chris and his team. And we look forward to the results of that improving Ventas performance and position and realizing the upside that we know is in the portfolio.

Okay. And will he remain in his current Board seat at New Senior? Has that been discussed at all?

I mean, that's something that I would refer you to New Senior for.

Okay. And lastly, Bob, just a clarification, if you could, on the leverage. You said it would be stable throughout the year, I think at six times, I assume, that was at year-end. Could you just clarify that? But how does that sort of fit what with the $1.3 billion of recycling and the $700 billion of debt repayment?

Right. So simple source of uses here, Jordan, is we have got the $1.3 billion of sources coming in from the dispose. The uses of those are twofold, roughly $600 million of that is going to be redevelopment spend principally behind the R&I pipeline and development and $700 million is going to be debt repayment. And we run that all through the grinder that's flat on a leverage basis versus 2019.

Okay. I think I get it. Thank you.

Thank you.

Thank you. And our next question comes from Daniel Bernstein from Capital One. Your line is now open.

Good morning.

Hi.

Hi. So I would like to, obviously hindsight is 2020, but what lessons can you learn from the last couple of years in terms of the portfolio that you can bring forward as to, do you need more robust asset management, more CapEx early, more asset recycling early? Maybe that's really to Justin coming onboard as well? But what lessons can you learn from the performance in the last two years that you can bring forward and change how you operate?

Well, I think clearly, the actions that we are taking speak to those points. I think that bringing Justin being one of them in terms of expanding and complementing our strength with significant operating experience and perspective. I would say that really understanding the longer transition period in the ESL portfolio and communicating that more to you and generally obviously having consistent SHOP policies and so on, so that investors can really understand organic performance across companies which I think we have now tried to offer between us and Healthpeak which I think is a step forward. So obviously lots of lessons learned. I think over a 20-year time period we have really focused on delivering and on excellent performance. And I think we have had a short period here where we have not met our own expectations. But we are doing everything within our power to get back on the winning path and I am confident that the actions we are taking will do so.

Okay. And maybe this is related, but what gives you confidence that the SHOP portfolio is going to perform better or even better than the industry besides a rising tide raises all boats with the industry? I mean you obviously have underperformed within the SHOP. What gives you confidence that it can perform better in the future? Is it the location of the assets, the management at Sunrise, Atria, et cetera? Just trying to understand what can change within the portfolio versus where we are. And maybe that's just --

Well, first of all, again, look, yes, so we understand. So there are two things, as Bob described that affect our 2020 guidance. It was the end of the third quarter which mathematically lowers our start point going into 2020. So obviously when that happens, that has an affect on 2020. And then the cumulative absorption of the supply in our submarkets. And we know that that second aspect is improving and the NOI will inevitably follow. Plus, again, working with the operators on capital plans that are targeted and accelerated as well as bringing on more operating focused experience to work on pricing and so on. So those are all the actions that we are taking that we believe will drive improved performance.

Okay. And I know it's more than two questions here, but one last one. Just want to understand, was the $10 million of triple-net lease restructuring, was that already in 4Q? Or that's rolling into 2020? I just wasn't clear on that.

Correct.

You got it.

Okay. Rolling into 2020. Okay.

Yes.

All right. That's all I had. Thank you.

All right, Dan. Thank you.

Thank you. And our next question comes from Steven Valiquette from Barclays. Your line is now open.

Well, thanks. Good morning Debbie and Bob.

Hi.

So at the REITworld conference back in November, you guys gave a little more color on some of the specific secondary markets that were problematic back in 3Q 2019 with some of those ones in Texas, Utah, New York, California, et cetera. I don't know how much you want to get into that on this call. I guess I am just curious if there is any update on those markets you were pointing out as may be being expected to improve in 2020 from that prior list versus which ones may still be, let's say, difficult throughout the whole year? Thanks.

Sure. I will take that one. And obviously, I would say, the themes are very consistent with what we talked about last in that regard, namely the secondary markets, particularly in the fourth as in the third, continue see on a proportional basis more revenue challenge. And again, that's where we saw supply come earlier and the need to digest those units come first. So as we look into 2020, that said, second, some of the secondary markets have begun to see that turn. And as Chris was describing where, for example, we are focusing some of the capital, those would a good opportunities to spend targeted capital there. On the other hand, primary markets, so these are broad brush, you have to get of course get into specifics, but primary market is where supply came later and the digestion will come later, put it that way. And so we will expect in 2020 to see some of those primary markets having to deal with that supply. But at the end of the day, it's just timing because the trends are inexorable. We see the demand growth. We see the penetration growth. The starts trend, which has been favorable now for several years, those come together and manifest themselves in the upside that we keep talking about. And it's just a matter getting from here to there.

Okay. I appreciate the extra color. Thanks.

Thank you.

Thank you. And ladies and gentlemen, we do ask that you limit yourself to one question and one follow-up. Our next question comes from Jonathan Hughes from Raymond James. Your line is now open.

Hi. Good morning.

Hi Jonathon.

Hi Debbie. I was hoping you could clarify the augmented external growth strategy and relationship with the core and core plus fund? You mentioned only stabilized yields will go into that vehicle. Does that mean only value-added development opportunities will be targeted by Ventas and the historical external growth trajectory that was outlined last June is maybe also augmented down from $2 billion to maybe half that?

Not at all. So let me try to take it again. So the fund helps us grow our platform to provide augmented investment capabilities and capacity. And so basically, we have seeded the fund and then anything that grows the fund's assets under management will be new investments, typically at 40 cap rates and the fund will provide another arrow in our quiver in terms of access to capital and will enable us to acquire things that, in some cases, would be inefficient for us to acquire on balance sheet. And as I said before, we have an unlimited capacity to invest on balance sheet and then eventually in the fund as it continues to grow. And if you look at Prologis, for example, as an example, then you would see that it helped overall enterprise grow and that's what we are aiming for. And in addition, as we mentioned in the release, we will be the 20% GP of the fund, so we will maintain a significant interest in those assets as well. So it's an overall win for everyone, the new stakeholders in the fund as well as Ventas shareholders.

Okay. So the growth trajectory at Ventas as a whole is the same, more on the outside vehicle. And John's team, it sounds like they have been pretty --

The same or better is the theory, yes, enhanced.

And John's team, it sounds like they will get very busy. Okay. All right. And then one more on the ESL. I know you are looking for a JV partner and demand for senior housing is strong, but this same portfolio ultimately didn't find a partner when I recall it was being marketed back in late 2017. Why sell it now or JV it now after NOI has taken such a drastic turn for the worst. It just feels like we are selling at a trough. Why not just keep it as a whole and lap it and in 18 months, we lap these comps and you get the benefit?

Great question, because we do see upside there over time. And so first of all, historically speaking, we chose not to pursue a partnership at that time and so I think that's important for you to understand. And then secondly, we have taken these initial steps to do a joint venture. There is institutional interest in generally partnering with Ventas and in senior housing in particular. And we believe that continuing to recycle capital and attract capital and gain more partnerships with investors is a positive development for Ventas. And this could enable us to do that.

Why did you not JV it two years ago?

We made a decision at that time that it was not in the best interest of the company to do so.

And you stick by that today as NOI has gone down pretty precipitously?

We do and we will be happy to talk to you about more color offline, but yes, we do.

Okay. All right. Fair enough. I will follow up offline. Thank you.

Okay. Look forward to it.

Thank you. And our next question comes from Michael Mueller from JPMorgan. Your line is now open.

Yes. Hi.

Hi Mike.

Hi. Just a quick question on SHOP occupancy. The 160 basis point gap at year-end. Bob, I know you talked about that closing some. But we can talk about like a magnitude of how much of that closing would you say is really good progress versus kind of a base case scenario? Did I ask right?

Thank you for asking. Yes, I appreciate that. And the goal is to narrow.

Yes. So in the right direction.

That's a lower number than 160. Obviously, there is a related question which is pricing. So both of those need to be answered together. We need to be smart on both occupancy and price. Revenue, when all is said and done, growing revenue is a job to be done. And so that's really positive.

Okay. And a real quick on one ESL, the JV. Should we read into that that you think the progress, that your process that turned that around is going to take longer, so you just want less of it today? Is that the right way to think of it?

So this is John. I wouldn't read into it that way.

Okay.

We are going to stay in.

Okay. Got it. Thank you.

Thank you.

Thank you. And our next question comes from Chad Vanacore of Stifel. Your line is now open.

Hi. This is Tao Qiu, for Chad. Good morning.

Hi Tao.

Hi. My first question is dividend coverage. So FAD this quarter was $78 million versus $79 million dividend. And 2020 guidance implies some declining FFO. So how do you feel about your dividend at this point, also in light of the higher CapEx you are expecting in senior housing?

Yes. Thank you for the question. So obviously the dividend is an important component of our total return and we feel good about where the dividend is because we feel good about investing in our portfolio this year, which has increased FAD this year so that we can realize the benefits of the upside in our portfolio. So as we look forward, we do see the benefits of senior housing turning up. We also see the benefits of the R&I development pipeline that we have been heavily investing in with those assets starting to come online and contributing to cash flow and EBITDA as they open in later 2021 and into 2022 and they will make a significant contribution at that time. So the combination of and then the steady growth of the office and healthcare portfolios all combined make us feel comfortable.

Okay. And a follow-up on the RevPOR numbers. Can you talk about what kind of rate increases you are seeing, now that you have the month of January under the belt? And how does it compare to prior years, given the low occupancy level you are seeing? Are you interested in more discounting to drive that revenue?

Yes. Thanks. So there is two pieces of price. I will touch on both. One is the in-place resident increase that happens this time of year and that's been healthy, I would say, consistent with last year. That's encouraging and an important part of the revenue. And then to your second question which is, I would think in terms of the re-leasing spread when resident leaves what are we seeing on pricing? There remains a competitive market. There is no question about it. Therefore our guidance for the year of modest RevPOR growth incorporates both those thoughts. But so far, I would say, the start to the year has been in line with our expectation.

Thank you.

All right. Thank you.

Yes.

Thank you. And our next question comes from Omotayo Okusanya from Mizuho. Your line is now open.

Hi. Yes. Good morning everyone.

Hi Tayo.

Welcome back, Tayo.

Thank you. I appreciate it. So again, congrats on the Justin Hutchens' exit from the U.K. I think again, you are generally hearing positive commentary on him.

Yes.

But again, the core question, I think a lot of us trying to get on to the call is, fundamentally what's really changing here in regards to how you are going to operate the SHOP platform going forward? I think again, the asset sales are helpful. But again, your SHOP portfolio is $12.6 billion and I think you are only selling $600 million. Yes, the ESL JV is helpful to reduce exposure. But what really is fundamentally changing here to give us more confident that the SHOP portfolio will perform better going forward?

Okay. We have been trying to get at and respond to your questions. Fundamentally, if we have a 2020 and realize the benefits of Justin's contributions and we see cumulative supply declining in our submarkets as we expect and we continue to take these other actions that we have described which includes targeted capital plans, simplified pricing and so on, the combination of those things makes us confident that the portfolio will perform and we will realize the upside in the portfolio. And we have to demonstrate that over time. And that's what we are committed to doing.

Is anything changing in regards to just data analysis, lease structures, the type of relationships you are trying to form with operators, I guess that's kind of part of what I am kind of looking for about? What structurally is changing? Granted, ultimately, again fundamentals will be better for the sector. But again, that's kind of a rising tide lifts all boats. I am trying to think Ventas specific, what really changes here?

Well, I would add the two things. One, there is significant incremental dedicated horse power is this portfolio. Obviously critically important to us. Dedicated focused and with an individual who has an incredibly unique set of skills with background as a REIT, with deep expertise within the operations to be able to come in, complement and accelerate that which we are already doing, but really can bring that extra bandwidth. I would call it the multiplier effect that he is going to bring operationally and strategically for the portfolio. And so we are excited about that. And the portfolio itself and the operators themselves, again, as we painted to you before, we think we are in good markets with good operators. So it's really then how do you optimize within that.

Got you. All right. That's helpful. Then my second question, your cost of capital is actually pretty attractive at this point. And so when we kind of think about the acquisition outlook going forward, any kind of thoughts around again, clearly you are trying to do more development in life sciences, but from an actual acquisition perspective, how do you kind of think about the very attractive cap rates in skilled nursing, for example on the hospital side versus doing more on the MOB side or senior housing side?

So good. Yes. I mean I think that your point is well taken. We have talked about our investment framework that we have used over the years and that we are augmenting today with the launch of the fund and enhancing. And basically, as you know, we have created a history of accretive acquisitions through basically really high-quality, relatively lower cap rate assets, such as 1030 Mass life science building. We have our kind of right down the middle investments, such as our successful LGM investment last year, which is performing well in both the stable assets as well as the lease-up assets. So generating kind of between a 5% and 6% unlevered return. And then we have a smaller category of higher yielding that could include development. It could include healthcare, government-reimbursed assets and so on where we allocate a certain amount of capital and the overall combination of those investment activities is what has driven the accretion from investments historically. And we would continue to stick with that framework.

Okay. Thank you.

Thanks Tayo.

Thank you. And our next question comes from Connor Siversky from Berenberg. Your line is now open.

Good morning everybody and thank you very much for having me on.

Hi Connor.

So just related to these disposition expectations for 2020, about $600 million. I mean do we have any kind of pricing expectations on these assets? And then is there any rhyme or reason as to the markets you have identified for these dispositions?

Sure. It's $1.3 billion, inclusive of the contributions which are effectively sales to the fund. And I believe, in the aggregate, it's a sub-5% cap rate.

Okay. That helps. And then I mean there's a note that these funds are expected to be recycled into the R&I pipeline. I mean how quickly or any kind of color on how quickly you can move those funds into maybe new development projects or acquisitions?

So yes, just to clarify, the $600 million of dispositions are turning around and going to be invested in $600 million of development or redevelopment this year. That's on existing projects. John mentioned that we announced $900 million-plus of new projects last year. And so it's really investing behind those, first and foremost.

So exactly what you said.

Yes.

Yes. Okay. All right. Well, that helps. Thank you very much.

Good. Thank you.

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

Yes. Thank you. I was hoping you could provide some color on the triple-net leases that have under one times EBITDARM coverage. I am assuming that's largely Holiday and Brookdale. Are you comfortable holding those leases today? Or should we expect some type of restructuring over the next few years or even sooner?

Michael, thanks for being patient and thanks for your question. As Bob pointed out and we have talked about before, we were very happy to see the improved report from Brookdale yesterday. I am really excited and happy for Cindy and the management team. They have done a ton of heavy lifting to get to this point where they are really starting to see some traction and some positive trends. So we feel really happy for them and good for us as well. In terms of Holiday, again, we continue to have fixed charge coverage that makes rent reliable. And that all having been said, Bob mentioned that our range does include in the triple-net side, the possibility that we would decide, if appropriate, to take action on different tenants in our triple-net portfolio and that's all baked within the guidance.

Okay. And then I guess just in general, I guess not specifically related to those two tenants, but how do you ensure that operators that have this tight lease coverage ratios are committed to positioning those communities to compete in the current marketplace and even position themselves to benefit from the demographic tailwinds, just overall?

Yes. I mean good question and an important one. And often you do see some lesser spend on a triple-net lease in some of those circumstances. So what I would say is the leases generally provide for some required CapEx spend and/or investment. We often will work with the triple-net operators to provide additional capital at a return to continue to invest in the assets. And then lastly, ultimately as the owner of these assets, we can also just make investments in them as we deem appropriate, either on transition or otherwise, to keep them competitive in their markets.

Okay. And then with Holiday and Brookdale, have you pursued, I guess, any specific asset sales? Or is that included in guidance? And I know with Brookdale, you originally had a handful of assets set aside to potentially sell. I mean did you officially take those off the market? Or what's the plan with those potential sales?

Good memory. In fact, when we did our positive deal with Brookdale, it seems like a lifetime ago, but we sort of anticipated, first of all, that their operating performance would improve through the efforts that Cindy and the team are making. So again, we are happy to see that. We did work with them to identify some assets that we both thought would be better outside the portfolio in other operators' hands. We have sold some of those and some of those are included in our 2020 disposition guidance. So good memory and we are doing that.

Okay. Great. Thanks Debbie.

Thank you. So again, thanks for your patience Michael and I think you are our last questioner for today.

Confirm.

Okay. So I really appreciate and we all at Ventas sincerely appreciate your participation in today's call, your interest in the company and your support of the company. You continue to have our commitment to do everything we can do to benefit our stakeholders, our company and our employees and our partners. So thank you. We look forward to seeing you in Florida in March.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.