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Ventas Inc
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Good day, ladies and gentlemen, and welcome to the Q4 2017 Ventas Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.
I would now like to introduce your host for today's conference, Mr. Ryan Shannon, Investor Relations. Please go ahead.
Thanks, Crystal. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the year end quarter ended December 31, 2017. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws.
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, 2016 and the company's other SEC filings.
Please note that quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure, as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com.
I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.
Thank you, Ryan. And good morning to all of our shareholders and other participants, and welcome to the Ventas year end 2017 earnings call. I'm delighted to be joined on today's call by our standing team. As we discuss our excellent year, highlight our enterprise strength and value and provide the framework for our 2018 expectations.
The Ventas advantage has allowed us to deliver sustained excellence through cycles for two decades. This success has been founded on solid strategic vision, foresight and innovation, proactive capital allocation decisions, rigorous execution and a stable expert team. As we enter 2018, which is Ventas' twentieth year anniversary, we are confident we will continue our long track record of excellence as the leader in our space.
Let's start by quickly recapping 2017, which was a record year for Ventas, setting new highs for net income and revenue, generating 5% operating cash flow and dividend growth and delivering normalized FFO same-store property cash NOI growth at the high end of our expectations.
To enhance our diverse portfolio, we made nearly $2 billion in value creating investments, including significant expansion of our exciting University-Based Life Science business, profitably disposed of almost $1 billion in assets and completed several innovative deals with our leading operating partners.
We made significant progress on our commitment to environmental, social and governance matters and received numerous prestigious recognitions for our outstanding ESG profile. Our team stayed strong, smart and unified as we executed our business plans with great success.
As we look to 2018 and beyond, we're laser focused on finding ways to deliver value for investors. We've anticipated and are prepared for today's market and business conditions. Every environment end cycle provides opportunities for those like Ventas through our experience, strong and nimble enough to take advantage of them. That's what the Ventas team has done for the past 20 years.
With that as a backdrop, we expect to grow our total same-store portfolio cash NOI 1.5% to 2% in 2018. Our expectations are benefiting from our portfolio diversification and mix with nearly two thirds of the business in our office and triple-net lease segments, while our SHOP portfolio is currently working its way through a timing mismatch of supply and demand, exacerbated by this year's severe flu season.
We know that demographic demand from seniors will increase significantly, which should benefit performance in the SHOP portfolio in the coming years. Our enterprise is expected to generate approximately $3.5 million on consolidated revenues and $2 billion in consolidated net operating income in 2018. We expect our normalized FFO per share to range between $3.95 and $4.05 per share.
During the year, we again intend to demonstrate capital allocation success by generating $1.5 billion as we harvest profits from the successful investments we've made. These include, receipt of full repayment on nearly $850 million of plus 9% well secured, well-structured loans in life sciences and hospitals, completion of a joint venture with an institutional capital partner on the valuable senior housing portfolio and a sale of other assets.
We intend to recycle these proceeds and process into our future growth by ramping up to over $400 million. Our funding of premiere development and redevelopment projects, principally towards the life science and MOB assets and by retiring outstanding debts in a rising rate environment.
While these capital allocation decisions do have an effect on our year-over-year FFO expectations, they're the right steps in the current environment to realize gains from successful capital allocation, diversify our capital sources and prove our financial strength and flexibility and create further dry powder where the market adjust to the changing rate environment.
We also continue to pursue and evaluate opportunistic investments across our verticals. We remain focused on allocating capital wisely, where we find attractive risk adjusted returns, see a significant competitive advantage or strategic upside or can help a customer achieve its goal.
We've averaged over $2.5 billion in annual investment volumes since 2012 and haven't built any material acquisition activity into our projections for 2018, consistent with our long standing historical practice. If we see investment opportunities that are attractive and high quality, we have the capacity and the ability to execute on them.
Our 2017 and nearly 2018 activities highlight the benefits of our partnerships with leading platforms and the value of our properties. Due to the strength of these platforms the quality of the portfolio and strong forward demographic demand, institutional equity interest in Ventas' assets and operators is exceedingly high.
Here are some recent proof points. Atria recently received a major equity investment in its operating business from Fremont Capital. This recapitalization demonstrated Atria's increased value since our original investment and validated Atria's leading market position as an outstanding senior housing care provider in a highly fragmented market.
Second, Kindred recently agreed to be acquired by two experience healthcare investors, who are putting significant new equity capital behind the Kindred management team and their LTAC, IRF and rehab business. With recent positive reimbursement news and continued operational strategies taking hold, our LTAC should generate improving results in 2018. We know how long and hard our friends at Kindred worked to achieve this positive outcome for Kindred shareholders and we look forward to continuing to partner with them.
Third, we see significant institutional interest by global capital sources in the creation of a joint venture for our portfolio of over 70 senior housing communities. We recently transitioned to a newly formed manager ESL. We were pleased to successfully complete the transition of these communities and our strategic investment in ESL last month. We're confident ESL will capture operational upside and additional value from this portfolio. ESL has already become a sort after manager in senior housing and we're delighted to back industry veteran Kai Hsiao and an experienced team of executives in this highly strategic new management company.
Ardent continues to thrive and perform exceptionally well through year end. With its pending acquisition of East Texas Medical Center in partnership with the University of Texas System, Ardent is expected to generate over $4 billion in revenue from its operation of 31 hospitals in seven states, with 40% average market share.
And finally, our leading life science platform Wexford remains to source a significant growth and value creation. In 2017, we invested nearly $400 million in development commitments and acquisitions, including projects anchored by or affiliated with Brown University, Virginia Commonwealth, UPenn and WashU.
This exciting business line with top tied highly rated research institutions and companies has grown nearly 40% since inception. And we continue to see growth opportunities at attractive risk adjusted returns as we invest to meet the needs of premiere research institutions and companies. We are also very pleased to see that congress has significantly increased NIH funding over the next few years.
A word on our dividend and tax policy before I close. The recent tax cuts as we all know provided significant rate reduction to 21% for US corporations. In addition, owners of pass through businesses including real estate companies received an effective rate reduction to just under 30% at the highest marginal rate. That rate also applies to reap dividends.
We were pleased that our board recently increased our dividend 2% because our growing reliable dividend is an important component of the total value propositions we offer our shareholders. To provide our shareholders with the benefit of the new rate, our fourth quarter 2017 dividend will be taxable in 2018 under the new improved rate. Our dividend increase further demonstrates our confidence in our business and our cash flow. And that's a good segue to my conclusion.
In short, we remain bullish on our business and our company. We have near term burgeoning demographic demands, a large fragmented industry, a proven consistent strategy, a strong balance sheet, excellent operating partners, a growing development pipeline of trophy assets that will become additives to earnings in the future, a cohesive experience team and a track record of superior performance through cycles, the Ventas team is ready for another 20 years of success.
With that I'm happy to turn the call over to our CFO, Bob Probst.
Thanks Debby. I'm happy to report another strong year of cash flow performance from our high quality portfolio of healthcare, seniors housing and office properties. Our total property portfolio delivered same-store cash NOI growth of 2.5% for the full year 2017. At the high end of our 2% to 2.5% total company same-store guidance. All segments contributed to this growth and each delivered at the midpoint to the high end of our original same-store guidance ranges.
In 2018, we expect our total property portfolio to generate continued positive same-store NOI growth in the range of 0.5% to 2%, benefiting from diversification of asset class, operators, geography and business model. Let me detail our 2017 performance and 2018 guidance for our properties at a segment level starting with our triple-net business.
Our triple-net portfolio grew same-store cash NOI by an excellent 3.7% for the full year 2017. In the fourth quarter triple-net same-store cash NOI increased an outstanding 4.2% for the third quarter of 2017. Trailing 12 months, EBITDA and cash flow coverage in our overall stabilized triple-net lease portfolio for the third quarter of 2017, related to the above information was consistent with prior quarter at 1.6 times.
Coverage in our triple-net same-store seniors housing portfolio was 1.2 times, down from 1.3 times last quarter as a result of escalated growth outpacing underlying asset level cash flows. Cash flow coverage in our same-store IRF and LTAC portfolio held stable at 1.6 times despite rent increases and the impact of the LTAC reimbursement change.
Finally, Ardent performed exceptionally well throughout 2017.Third quarter 2017 results were strong compared to leading publicly traded hospital systems in the US, with admissions, adjusted admissions, revenue and EBITDA growth did impact. As a result Ardent rent coverage held strong at three times. For 2018, we expect our triple–net portfolio overall to grow from 3% to 4%, driven by in place lease escalations.
Moving on to our senior housing operating portfolio, our SHOP results for the full year and for the quarter were right in line with our expectations. Indeed, our initial SHOP guidance provided in February 2017, proved to be highly accurate throughout the year and top to bottom through the P&L. Full year same-store occupancy in 2017 declined by 180 basis points versus 2016, driven by the cumulative impact of new deliveries in select market. Growth for the year approached 4% and fuel the bottom line.
Operating expenses were held to 2% increase despite labor wage growth of 4%. For the full year, same-store cash NOI increased by 1.3%, above the midpoint of our original guidance. The occupancy gap versus prior year narrowed to 180 basis points in the fourth quarter, with our new deliveries continued to pressure revenue. Q4 expenses were held under 2% through a continued management of direct and indirect costs. At the bottom line Q4 same-store SHOP cash NOI declined modestly in line with our expectations.
We continue to see strength in high barrier markets including Los Angeles, San Francesco, Boston and Ontario. Despite the strength, we observed mid to high single digit NOI declines in markets affected by new competition, most notably within secondary markets.
Turning to 2018, we expect full year same-store SHOP cash NOI to be lower in the range of 1% to 4%. SHOP same-store cash NOI is expected to decline in 2018 due to the full year occupancy impact of a severe flu season as well as the cumulative impact of new supply in certain markets. Let me expand on each of these drivers.
First, flu. This flu season is the most severe in years in terms of duration and reach across most markets of the United States. Flu related hospitalizations are up nearly 70% among seniors aged 65 years older. Those supportive of hospital and MOB volumes should negatively pressure senior housing occupancy in two ways, through accelerated resident move outs as well as limited move ins due to community quarantines.
The second driver of 2018 SHOP guidance is the cumulative impact of new supply. The elevated levels of new deliveries we observed in 2017 are expected to further accelerate in 2018, with new openings approximating 3% of inventory in our trade areas. On a positive note, new starts in Q4 '17 were down nearly 20% in our trade areas. However, delayed new deliveries increased overall construction to inventory by 30 basis points on a restudy basis to 6.2%.
In light of these two drivers, we expect that same-store occupancy in 2018 will decline in the range of 200 basis points versus 2017. In terms of a rate, we continue to see opportunity to drive in place rent increases for existing residents. The majority of the 2018 realtors have now gone out and average 4% across the portfolio and thus far are holding up well. Price competition on new resident rates are expected to dampen overall growth for the year to approximately 3%.
From an expense perspective, a tight labor market and competition for staff is expected to drive wage pressure in the 4% range, partially offset by fluxing staff and managing non-labor costs. Therefore, we expect same-store cash NOI to range from minus 1% to minus 4%. The range is a function of the timing and occupancy impact of new deliveries and the resulting price competition in the supply challenged markets.
Although the current supply demand miss-match is compressing near term profitability, we continue to believe in the long term opportunity in seniors housing and in our excellent market position with our high quality real estate operated by a select group of the nation's leading care providers.
Let's round out the portfolio review with our office reporting segment, which represents approximately 25% of Ventas' NOI. For the full year 2017, office same-store cash NOI increased by 2% at the high end of our guidance. Q4 was the first quarter in which our office same-store pool included both our life science and our medical office portfolios.
Our life science portfolio performed incredibly well in the fourth quarter drawing same-store cash NOI by 5.6%, as new leasing in our well forced assets to our life science occupancy is 330 basis points higher to an outstanding 97.4%. The benefit of our ongoing development pipeline will begin to benefit the same-store pool starting in 2019.
Turning to our highly valuable medical office business, MOB same-store cash NOI for the full year 2017 increased by 2% at the high end of guidance. Our teams did an excellent job managing occupancy despite 33% higher lease expirations in 2017. Tenant retention in 2017 rose to over 80%. Revenue also benefited from in place lease escalations that exceeded 2%.
In 2018, we expect 1.5% to 2.5% growth from same-store medical office portfolio, guides us to stable occupancy, just like continued lease expirations at elevated levels, low single digit rate growth and expense controls. On a combined basis, our office portfolio of life science properties and MOB assets is expected to grow same-store cash NOI in the range of 1.75% to 2.75% for the full year 2018.
Now, on to our overall company financial results, in 2017, we delivered earnings growth at the high end of our guidance range, completed more than 1.8 billion of investments and 900 million of profitable dispositions with gains exceeding 700 million, made significant progress in enhancing our financial strength, raised our dividend and executed our strategic initiatives.
Normalized FFO grew 1% to $4.16 per fully diluted share at the high end of our $4.13 to $4.16 guidance range. Our same store cash NOI for the portfolio grew 2.5%, also at the high end of our guidance.
We bolstered our liquidity by 1.4 billion through increased revolving credit facilities. Our balance sheet is in good health, with net debt to EBITDA of 5.7 times, fixed charge coverage at exceptional 4.6 times and net debt to gross asset value of 38%.
Meanwhile, cash flow from operations grew 5% in 2017 and the company's board of directors declared a dividend for the first quarter of 2018 of $0.79, representing a 2% year-over-year increase.
On to the full year 2018 guidance for the company, the key components of our guidance are as follows. Income from continuing operations is estimated to range between $1.34 and $1.40 per fully diluted share.
Normalized FFO per fully diluted share is forecast to range from $3.95 to $4.05. We expect our portfolio will grow same-store cash NOI by 0.5% to 2%, with same-store NOI growth at the midpoint as measured on a GAAP basis roughly 100 basis points lower than cash NOI.
Finally, debt reduction is expected to further improve the company's net debt to adjusted pro forma EBITDA ratio to approximately 5.5 times by year end 2018. Substantially all of the change in year-over-year normalized FFO is explained by three drivers. First, despite our track record of accretive new acquisitions, our guidance assumes no material and announced acquisitions in 2018, as is our normal practice entering the year.
Second, the impact of nearly 1 billion in late 2017 dispositions, together with a further 1.5 billion new 2018 dispositions with proceeds here marked for that reduction, drives approximately $0.10 of 2018 FFO reduction. Though dilutive to FFO this capital recycling activity reflects Ventas' capital allocation excellence, namely, we sold 700 million of sniffed assets in late 2017 at a highly attractive 7% cash yield.
We expect nearly 850 million in repayments in 2018 on loans extended by Ventas that created significant value for our shareholders. Most notably an expected early prepayment of the 700 million, 9% loan to Ardent that funded the successful LHP acquisition. The disposition guidance also assumes the sale in 2018 of a share of the senior housing assets transition to ESL, creating a new strategic operating platform and attracting a new institutional capital partner.
The third driver of FFO change year-over-year arises from aggressively managing our balance sheet. In addition to debt reduction from disposition proceeds, we expect to proactively refinance debt in 2018 with longer duration fixed rate debt to both extend our maturity profile and reduce refinancing risk. Together with LIBOR increases, these refinancing actions are expected to reduce FFO per share by $0.07.
Moving on to other important elements of our 2018 guidance, we expect to accelerate our investment in future growth via approximately 425 million in development and redevelopment funding. Notably, in new grounds of developments associated with UPenn, WashU and Brown. 2018 guidance includes fees and payments from tenants generating an incremental $0.04 of positive FFO in 2018, most notably arising from the announced Kindred sale to TPG, Welsh, Carson and Humana.
No equity is included in guidance and therefore the 2018 outlook assumes approximately 360 million weighted average fully diluted shares. To close, the Ventas team is pleased with our performance in 2017 and strongly committed to sustaining our long track record of excellence in 2018 and beyond.
With that I will ask the operator to please open the call for questions.
Thank you. [Operator Instructions] Our first question comes from Tayo Okusanya from Jefferies. Your line is open.
Yes, good morning Debbie. So the model of questions from my end, the short portfolio, I understand what you are saying about supply having an impact and things of that nature. But, could you talk a little bit about, is part of it also more difficult year-over-year comps from Canada that did really well last year, that's slowing this year. And, I guess some of us are just a bit surprised about the big magnitude of the decline in '18 versus '17.
Thanks Tayo, I'm going to turn that to Rob for answer.
Sure Tayo, within the guidance it's very clear with the two drivers are year-over-year, it's full of suppliers as outlined. If you look at the market level clearly that's most pronounced particularly the supply in the US. We expect Canada would continue to perform well in '18, clearly driven by a rage given the high occupancy. But, if this is really been a movie that's been on what we saw over the last year, we've been very consistent and accurate on the forecast. You saw that happening in the fourth quarter on the heels of a new supply, so it's really continuing that trend line.
Okay, that's helpful. And then secondly, in regards to your guidance versus the street, I think one of the things I've almost had difficulty modeling was that the Armcrops [ph] and the whole transition mode towards UB a minority owner and a JV versus having full ownership. Could you just give us a little bit more detail around again the overall size of the transaction, may be some pricing data? Anything that's going to kind of help us to model that a little bit better versus the limited data we had going into the quarter?
Tayo, this is Debbie and congratulations on your forecasting, you get a prize for that. The - what I would say about the transaction is, you know we are very happy that we have successfully completed the transition of the asset and our investment in the operating business at ESL and we did that in January successfully. We kind of separated, you have to think about the impacts in a couple of buckets and I think on the NOI side for the period of time that we own, you know obviously we'll have 100% of NOI from the asset. And, we expect that NOI to have operational upside over time, so excited about that. And, then we've treated the joint venture essentially as in the disposition bucket when we talk about the billion and a half of expected dispositions that would be the pro-radar share of what we would be potentially partnering with the global institution on capital source on. And, receiving proceeds from that, and so, we would expect that to add an attractive evaluation obviously, and the amount and the evaluation of the asset while we expect to be positive will be refined as we get closer to completion of that transaction, which we would expect should be done maybe a year.
But, just to clarify, that 1.5 billion you have in recycling in your 2018 numbers is all across the entire thing?
No, no, that's what I was saying is you know if you assume evaluation, pick a number caller one, then if we were joint venturing such that an institutional capital partner was buying say, 33% of the portfolio, then the disposition proceeds would include 0.33 of that. So, that's how it's being counted and hopefully that provides clarity for modeling.
I think that 1.5 billion has 350 million of loaner payments and then the balance is property asset dispositions including ESL that we described.
Got it, that's helpful. The last one for me if you don't mind, the 200 in gain on sales that you had in 2017, does that come back to interest or some type of special dividend? Can you kind of re-invest those gains into acquisitions, you just going to talk about that kind of extra liquidity that you generated?
Yeah, I mean we had over 700 million of gain since 2017, and, I would say we have been able to redeploy those proceeds into a combination of redevelopment and development projects as we talked about, debt reduction and of course some of that does come to our shareholders by virtue of our dividend. So, that's how those proceeds have been utilized.
Okay, helpful, thank you.
Our next question comes from Michael Carroll from RBC Capital Markets. Your line is open.
Yeah, Deb yesterday I touched on your comments regarding the investment market till date. What is the Ventas's strategy and are you likely to become the fed line to the near term until market price is adjusted with the higher interest rates that we've seen?
Hi, good morning, so again, in our experience kind of working through market changes like the one that we are currently going through, I would say that we are very confident in our ability to be good capital allocators. That, I think then on the buying and the self-side demonstrated over the last couple of years, we continue to be active and seeking value creating investments as and when we find them and our priorities clearly are to continue to invest behind trophy development and redevelopment projects that would be added in to earnings in the coming years. And, we continue to try to support our customers and find other opportunities that will create value for investors. So, there may be, as we've seen in the past a lag between the change in the public market environment and private market evaluation and we are ready to take advantage of opportunities when they arrive.
Okay, and then just last question real quick, can you provide some additional color on your growth plans with Ardent and what was the main issue trying to transition that debt position on the LHP portfolio to equity ownership position?
Yes, we've already said that we thought that the LHP loan that is the $700 million plus loan, that we made to fund our Ardent acquisition of a high quality hospital company LHP, and again we feel very, very good about all the hospital investments that we have made. And, we said, when we made it, that they are two good outcomes, one is that we would get paid back on the loan, which will make it an excellent investment. And, the other might be that they get converted into an equity position. Right now, our expectation is that it would be repaid in 2018 and we think that's a very positive outcome. And, again overtime, we really we believe in Ardent and we know, that they are operating high quality asset and overtime we hope to convert some of that into equity ownership. So, we are in a perfectly hedged position and we are supporting their growth and I think making good investment.
That's great, thank you.
Thank you. Our next question comes from Schmidt Ross [ph] from Citigroup. Your line is open.
Great, can you hear me? Okay thanks. I just wanted to ask you - you noted that the net lease on senior housing, net lease coverage came down to about 1.2 times, for the third quarter. And, given that fundamentals worth continuing to be challenging in that space, are you confident that the portfolio different to decline to under one times coverage and it's too soon to talk about, potential rent reductions, just how are you thinking about that coverage going forward?
Hi, Schmidt. Overtime, again when you have to triple net lease assets, you would expect EBITDA to vary as running creases and you go through operating cycles on assets. As we see here today, we are comfortable with the performance which again is expected as we've talked before and our current expectations are that we'll continue to have all of our material rent paid in 2018, and feel good about that.
Okay, and then I just wanted to ask you too, just looks like the percent of MOB's is rolling in 2018, went up a little bit sequentially from what you achieved in the third quarter and I just wonder what was driving that?
You are correct Schmidt, it is up, you'll recall '17 was already at elevated levels, '18 we are seeing more of the same, and we've added some assets in that pool, so pools are changing but at the end of the day, the team has done a great job in retaining tenants. I mentioned we had over 80% tenant retention and that's great. We hope to have the same going into '18, but these two years in particular has been at elevated levels.
Alright thank you.
Thank you. Our next question comes from [indiscernible] from Bank of America. Your line is open.
Hi, thanks for the time. Good morning. Just on the idea guys I was hoping you could talk to just as a whole what you are expecting for expense growth, are you talking a little bit about the labor strategy equation and what the guys questions, any color on G&A?
Total OpEx which you know is 60% of that is really labor driven, the rest remaining 4% labor increases, very much in line with what we saw in '17, which itself records reflecting some of the pressure we see on the tight labor market. We expect to see some offset with non-labor expenses, managing those down and also again flexing labor in '18. Albeit there is some moderation of that as we think about the active development. These are the flexing labor in 18 and so, though there's an offset, it's not a full offset and that's inherent in the guidance.
And, G&A sorry?
In total OpEx, the total OpEx line. G&A for?
The corporate.
Look we've always been very lean and efficient and there's no change there. We had some modest increases in cost just really driven by compensation, inflation etcetera. But, no significant headcount changes, no significant moves, very much controlled as always.
Okay and then just going back to Schmidt's question on the triple-net coverage, with the decline quarter-over-quarter yearlong one times EBITDA. You've got to get exposures Holiday in Brookdale and Holiday's had a tough goal at Brookdale as well. You've got some expirations coming in '19. Could you give us any sense on kind of what the game plan is and we just wanted to re-innovate that there is no assumed rent pay in the '18 timings?
Yes happy to confirm that last statement that as we sit here today we are comfortable with were things stand, and have assumed contractual rent payments through 2018. And, clearly we are in a part of the cycle, we are operating retail store are feeling a little bit of the heat. I would say that we've been in lease renewal situations many times before as you've seen with Kindred and other operators and we will continue to handle those obviously in the best possible way. And, I think you can count on us for that.
Okay great. And, just one more question about - the $0.04 you alluded to as fees is that being included in the same store triple-net guidance for '18?
No, it's not Von; it's not associated with the lease.
Okay, thank you.
Thank you. Our question comes from Nick [indiscernible] from UBS. Your line is open.
Thanks, hi everyone. About senior housing operating segment can you talk a little bit about how much the flu impact hits same-store NOI growth, I assume it's some level on occupancy, but maybe it's a tough question ask - answer, but just trying to get a feel for what - we didn't have a bad flu season what would be the occupancy assumption?
It's a really good question Nick, and very hard to quantify, despite many people trying to do so. It clearly does affect occupancy; we talked about accelerated move outs, and difficulty in move in just because we can't sell. And, that's been the occupancy impact, a number I can share with you is, we do track each of those particularly track, how many days are closed for selling to new potential residence year-on-year. And, that number has gone up by 250% year-on-year in terms of base closed for selling. Ultimately what that translates to in terms of occupancy, hard to say. But, as we've seen flu in the past, does not appear to happen is, it's not a timing issue, it doesn't rebound. You've altered your occupancy where that kind of carries forward throughout the year, so, hard to put a number on, but, clearly an impact.
Okay, that's helpful. And, then just going to the same store guidance here, you said in a lease out you're GAAP seems like growth is 100 basis points lower than cash, mostly due to the office segment. And, so I am just wondering what that is, is that just lot of free rent burning off? It seems like a big difference if office is 25% of the same circle?
We've talked about this before and given the 100 basis points as a rule of sum, and it is notably a straight line being the big difference, where the straight line rents farther, so we don't see that escalation which we view in the cash number. What's notable here, we want to highlight is the life science business, which is now an important part of the overall same store, has significant straight lining, so, that really is the new news if you like. But, the 100 basis point difference has been really consistent.
Okay, just one last one for me. Going back to, inside the 5.5 debt to EBITDA target by year end, and you have a lot of dispositions and a lot of debt payoffs assumed. But, looks like you still have some capacity to do acquisitions and hit your 5.5 debt of EBITDA target, so, can you maybe just walk us through the leverage mass and let us spell it, if there is actually any buying capacity that you have for acquisitions which are not assuming guidance, and where you can still get to that 5.5 debt EBITDA, thanks?
Certainly in the 5.5 looks like the assumptions we've given you and obviously we the ratio depends on both the EBITDA and the indebtness and that combination gives us 5.5. Clearly there is opportunity for investment, though we had 57 year end 2017. We've always been very comfortable in 5 to 6 and therefore the ability to use the balance sheet to go after acquisition or investment opportunities is clearly there. And the drive power and financial flexibility for us to do so, is an important reason why we are raising the proceeds to be lower. But, the math tells you it's 5.5 as assumed.
And, make sure you are counting obviously the funding of our lease East Trophy development project that we are working on that you provide the EBITDA in the later years, but, not in the current one, for they do use capital in the current environment.
Okay, thanks everyone.
Thank you. Our next question comes from Rich Anderson from Mizuho Securities. Your line is open.
Thanks, good morning. So if I could just get back to Brookdale for a moment and I think you know, trusting you to handle it and you know you have good track record in handling difficult situations. I'm curious, when you have 650 million of asset sales, inclusive of the joint venture, so some sub side of that, plus 2019 expirations in your triple net portfolio coming. To what degree is the 2018 plan on Brookdale asset sales addressing leases, or already they are coming to a 19 a combination of both you have. Do you have weaning towards one way or the other to address the Brookdale situation?
Well, thanks for the question and the confidence. Again, I think we are very comfortable with where we are right now. We have good assets, we have good agreements, we have good experience to come up with optimal outcomes for our Ventas shareholders and our tenement operating partners and we continue to use that tool kit really with everyone to make sure that we are coming up with these optimal outcomes that can create positive results for the tenants and also protecting base interest of our Ventas shareholders.
So, but doing it before '19 probably makes sense, is that a fair statement?
Well, it's not a science, and so that's the experience part where really there are optimal ways and times to take actions and you know our job is to advance and protect the interest of the shareholders while obviously, we have an interest in Brookdale's continued success as well. So, we are on it.
Fair enough, okay. I got you. And the last question is, you're paying down debt strategy is reminiscent of three great recession time period when you were pretty early to kind of hunker down on your balance sheet. I also think and we also think that this sector needs some price discovery to create maybe some type of care house, may be you get that with your ESL joint venture to some degree. But, perhaps some other combinations, to what degree are you kind of reinforcing your balance sheet with an eye towards some of the major dislocation of stock price performance in your group today? Do you think, may be not you, but do you think M&A in some form of fashion is a necessary component to the ultimate long term success of the healthcare REITs?
Yeah, that's a big question and I'm going to take on a part of it. But, you know, yes you were right about price discovery, I think that we had said and in turn and have proven out in many respects the very keen institutional interest in our asset types in our operators and part again that's because of the demographic demand in the business. But, we are in this changing price environment that relates to a whole health factors including changing rate environment. So, we are pleased with kind of how we've positioned the company so far, we like the idea that we have a 1.5 billion coming in the door expected in 2015, to enhance that right factor and financial strength and flexibility. And, what I want to share is that we wouldn't tend to use those resources in the best way we can to create value for our shareholders. And, it's probably too early to say what those best moves are, but the key thing is to be in the position to have a lot of options and a lot of firepower, and that's where we are. And, that's we are happy about.
Okay, sounds great, thanks Debby.
Thank you. Our next question comes from Michael Knott from Green Street Advisors. Your line is open.
Hi everyone. Just one question as you think about the construction of the portfolio, when you compare and contrast the SHOP guidance rate for '18 versus the continued stability and strength of the triple net portfolio. Does it make it all re-think, what's the right size of the SHOP portfolio within the overall Ventas asset base?
Right great question. I mean we have always prided ourselves on being extremely disciplined about portfolio diversification, which we look at in terms of asset type, business moral and operator, among other things. And, I think we have capped to that discipline and investors I think sometimes want us to go more forward one way or another. But, we think our portfolio construction has been very deliberate and I think our mix is actually quite good. Obviously, we have our out of fiscal nursing business, which is I would argue the most significantly challenged as a class in our business. We think the senior housing as I said - we have a high quality SHOP portfolio, that's about 29% of our NOI. And, that is a good percentage I would say as you get benefits, but you clearly go through some sick locality as we work our way through this supply demand finding miss-match. And, then you have the great office and triple net portfolio, about two ferrets of the company right now. And that office portfolio is growing and it's lower kind of wage type business. And, at the end of the day this portfolio construction is really an important priority for us and it is served our shareholders well overtime. And, we believe it's continuing to do so.
Okay, and then just on the, your response to the question a second ago about having the optimal firepower to take advantage of future opportunities perhaps. Just wanted to ask about the 5.5 times, that EBITDA is that the right leverage level, is that what you are thinking sort of the lowest that you will get to. And also, it sounded like the recent moves in the equity market did sort of pause you to become a bit more conservative and the capital allocation philosophy and view the balance sheet if I understand [indiscernible] but you certainly sound that part of that is getting the team like you are pretty conservative in 2017 on the capital allocation front? Thanks.
Good, right I mean I think you are reading it. We have as I said, we have anticipated in peers for current market and business conditions. We forget about where we are, we continue to evaluate balance sheet and capital allocation and gain portfolio diversification but follow the principles that are long standing ones that we followed for a long time, which is basically five to six times on the balance sheet and kind of strict rules around our portfolio mix. And so, '18 is exactly as you say a continuation of that, and I think the value of that approach is manifest.
Thank you.
Thank you, Michael.
Thank you. Our next question comes from John Kim from BMO Capital Markets. Your line is open.
Thanks good morning. You've mentioned in your prepared remarks that you think flu may have a 200 basis points impact to your SHOP occupancy this year along with new supply. Do you think this is emblematic of the industry and do you think that the triple net tenants are also forecasting this piece of the coin?
Just to clarify John, there are two key drivers on the guidance on occupancy, one is flu, the second is the supply impact. Those together are driving we estimate 200 basis points of occupancy decline year-on-year. So, it's the key note of impact as opposed to an individual impact within that. Clearly within the industry data if you look at it, occupancy pressures throughout the industry, you see that in neck, no difference. I think what you need to SHOP portfolio has been the pricing power in ways we've been achieving and that's what I said is really fueling the bottom-line, but occupancy seems to be in line within these interns.
Your [indiscernible] declined a little bit sequentially and I'm just wondering if the industry is more aggressive on buying ultimately and lowering rates, if you are going to be positive?
You right to say, we did see some erosion in the fourth quarter and indeed as we think about the guidance for '18, I mentioned for the year overall was 4% roughly in '17, we are expecting 3% in '18 on the annual growth. The driver of that is I've got the releasing spread it is, in select markets where there is new competition, we are expecting pressure, and that's what drives that differential.
And then, second question is on how to leverage, I think it's been a couple of quarters since you know that you were transitioning from MOB business and I'm wondering if you have an update replacement?
Well, he is sitting here with a big smile and that's a good question. So we continue our MOB CEO search and expect to be successful at it and Todd is at the helm and performing all his duties and we expect to have a successful transition of those duties in the course of the beginning of this year.
Do you think the person will have public MOB background?
Great question, I think we are looking at a wonderful slate of very attractive candidate with varied backgrounds. We have prioritized someone who is expert in the healthcare business and has all of Todd's other good qualities and so we will be happy to share more as the search concludes.
Alright thank you.
Thank you.
Thank you. Our next question comes from Jordan Sadler from KeyBanc. Your line is open.
Good morning. I just wanted to clarify on the Ardent repayment, you mentioned the East Texas Medical, would you have interest in participating there, is there an opportunity for Ventas?
I do want to talk about that. So, when we acquired an interest in Ardent West EGI several years ago, clearly cheated up as a really outstanding hospital operator, great assets, great market share and poised to be a consolidator. And, that is definitely happening as we jute up on the board, there's recent opportunity for Ardent to acquire East Texas Medical Centre West University at Texas. This term is a really exciting one and highlights Ardent stability to be a consolidator. I would say that overtime we certainly may have an opportunity to partner on the real estate. The current plan is to acquire the assets and integrate them and we are very supportive of that. Ardent will be more than double the size of when we first started, and be very, very successful.
And so we are well positioned overtime to, as we talked about with the LHP asset our recent acquisition and [indiscernible] and then the East Texas Medical, real estate, to become an owner there have. It's a process, yes, particularly with the fact that many of these hospitals have really valuable academic medical center and not so profit system, partnerships and relationships. And so, that is wonderful for the performance of the asset, it's wonderful for market share and pricing and for Ardent it is a process. So, over time as we saw with some of the assets we originally acquired to transition those into successful real estate ownership.
Okay and then in terms of your Ventas, you're going on 20 years of, I don't mean to point it out, but, you've got a pretty compelling run here and I'm not asking you about your planning for the future and a way in terms of your tenure. But, I'm curious you watched the ten year goal from probably close to 6% when you started lows in the 1% range and it seems as if the tenure has bottomed potentially and I know the market is quite worth a number of times here. But, it looks like it's heading higher, I see you selling assets here and I'm curious as you look may be, a few years out with a potential for higher rates, how should Ventas be positioned, balance sheet and asset wise? What makes the most sense to you right now?
Well I think we are very well positioned right now and what continually gets me excited about coming to work every day is the team that's here. The tremendous company that we've built and while we have done so much over those 20 years as you know, 20 years of 23%, 24% compound annual return, 20 years of growth from a couple of hundred million and equity GAAP. 20 years from 100% Kindred to 6% Kindred, what's exciting is there is so much more to do. Our sector I believe is still in the early stages of a private and public transition. I think it is still under owned in public end, and we continue to see tremendous opportunities in the space and are excited about the demographic demand that we have in our space, that isn't shared by many other real estate spaces and some of the very exciting opportunities that we see ahead.
Okay, thank you.
Thank you, Jordan.
Thank you. Our next question comes from Chad Vanacore from Stifel. Your line is open.
Hey good morning everyone. So just thinking of the Ardent transaction rate including $59 delivery payment, in kempt timing on that? Is that sort of midyear or what you are expecting that?
Midyear is a good assumption, yes.
Okay and then just on that my backed example of math would suggest that, the transactions and dispositions that you've laid out will get you probably down to leverage in the low 5s because you are saying is yearend we should expect mid 5. In that leverage assumption are there acquisitions and recycling of assets that's assumed in there?
No again, we are at 5-5 with those assumptions. A couple of things to know, the 1.5 billion is at a 8% blended yield on average, right being used to pay down debt in the range of 4%, 4.5% and we are also at the same time investing $425 million in development and redevelopment spending which is not yielding immediate NOI, that's future investment for future growth. So at the end of all that, it's 5 more times.
Okay, got it and then just thinking about the Brookdale portfolio. Could you give us an idea what coverage is today and can we assume that operating results on that portfolio actually more trend to what you've laid out on your SHOP portfolio? And then if it's not then what's different?
Okay so, as we've said in the past in terms of our triple-net coverage's, Brookdale's very consistent with the coverage's that we have in the entire portfolio. And in terms of specific trend in that business as we always are careful to do with our public operating partners would encourage you to talk to them about their specific operating results. But, within our portfolio, very consistent with the triple net senior housing reported coverage's.
Alright, then just one last one for me, when you are thinking about this JV in the [indiscernible] portfolio, can you give us an idea of why the strategic partnership with the new capital partner there?
Yes, I mean we think there are lots of strategic and financial benefits to doing it, we like to diversify our capital forces. We think it would be great to have a recognized global institutional partner there and we are - we believe there's upside in the portfolio, that is valuable and that it's a great opportunity for us to continue to recycle capital and continue building out for example our trophy life science portfolio and ramp up the development pipeline and fund activities like that. So we think it's an excellent opportunity all the way round.
Alright, thanks for taking the questions.
My pleasure.
Thank you. The question comes from Paul Puryear from Raymond James. Your line is open.
Hey, this is actually Jonathan, he's on - but good morning thanks for the time. So going back to the LHP Ardent loan, why are they prepaying and how do they plan to fund. It seems to me they wouldn't be able to get cheaper debt in the current environment relative to your guess. So I'm just trying to understand why the prepaying and where that money will come from.
Because Ardent has done well and because it acquired LHP, it acquired another asset and is on track as we've mentioned to acquire East Texas Medical Center. I think in general the idea would be to refinance a more streamlined capital structure for the entire company and it really is a mark of the company's success that we believe it will be able to do so. And that's our expectation and that they will use those proceeds to repay our loan and we would redeploy the proceeds as discussed.
Okay, fair enough. And then one more, I know you put out a press release following the Kindred news in December supporting the deal, but they put out a slide deck this month that doesn't suggest any slowdown in the headwinds facing the post-acute space. Do you see any risk from Kindred now being owned by private equity in terms of them being more aggressive and looking at cost savings, potentially including rent payments?
Well, that's a really interesting one because as I said I - as we look across the landscape here, whether it's Florida that's getting new equity funding from ETI to continued its stand or Atria, who's getting equity capital, I would say Kindred is in the same situation. We think it's a real positive that experienced healthcare investors like TPG and Welsh, Carson are putting fresh equity and a significant amount of it into the LTAC and IRF and rehab business with Kindred our leading operator and there will be a substantially, frankly de-levered balance sheet in that situation and as I mentioned we think that the LTAC particularly with its recent news out of Washington on the extended spell would in fact have positive operating trajectory in 2018. So we think the partnership with Kindred and the new private equity firms can create opportunities for us. We have done business with Welsh, Carson before and we really look forward to continuing to work with them and hope there will be opportunities for us together to do more.
Okay, that's great. Thanks for taking my questions.
Thank you.
Thank you. Our question comes from Daniel Bornstein from Capital One. Your line is open.
Good morning.
Good morning, Dan.
Hi, are there other opportunities to joint venture and say other asset classes for hospice senior housing for you such as medical office or life science? I haven't really heard you talk about that, but there seems like there should be opportunities there as well?
Absolutely, I'm glad that you pointed that out. Again, we have a valuable diversified portfolio. We have with Todd, scaled MOB business and in doing so created billions of dollars of value. Assets have grown seven times since we first came together, obviously a very attractive asset class to institutional capital and we're doing the same thing with the University based life science, that is investing early with the winning platform, putting capital behind it and creating value and overtime it's a great option to have and certainly there's great interest in out high quality office portfolio from institutional capital for possible joint ventures.
Okay and then in regards to the de-risking, de-leveraging of the business, I think that's the right strategy at this point and commend you on that. At the same time you're trading at about 10% discount to net asset value. What was there - was there a soft process in terms of buybacks versus de-risking, it almost implies that you think there's going to be very good opportunities going forward on the acquisition side at some point, if you don't buyback your stock at this point.
Great, another great question again. We think about - what we're doing is we are harvesting process and proceeds from successful investments, our immediate gear marking is for those proceeds to de-lever and improve financial strength, which gives us additional dry powder and then as the environment clarifies, obviously we believe that we will be really sound capital allocators and whether and how we would chose to use that dry powder. And there is many, many ways for us to that and you've sited some of them and we would expect to allocate that dry powder if at all to value creating investments which can include a wide range of possibilities including our own equity.
Okay, okay. I know it's already late in the call, but just one quick question on the timing - how you think about the occupancy loss and the minus 1 to minus 4 NOI? Do you think that the operational business is going to get better in the second half of '18 versus one half, I know there's normal seasonality, but how are you thinking about the kind of the trophy in senior housing at this point?
Well, we appreciate the questions and we want to make sure to give everyone their due time today, so I'm going to ask Bob to address that last one.
We really expect the quarters to look quite similar year-on-year. We don't see a wild variation, I mentioned the flu impact and how that tends to continue kind of drop down occupancy and carry forward through the year, so that will therefore affect all the quarters, but beyond that I don't see anything that's driving any unique changes quarter-to-quarter beyond normal seasonality.
Okay, I appreciate. Thank you.
Thank you.
Thank you. Our question comes from Todd Stender from Wells Fargo. Your line is open.
Hi, good morning. Thanks for staying on.
Good morning.
Back to the Canadian discussion, it's a market - it remains a bright spot for you guys in senior housing, but when you look at the price point of Canadian rents versus US rents even in your lowest bucket. Is affordability part of the key, I mean is that something that's going to support occupancy and is there an opportunity here in the US to play in that lower segment something in the 3 maybe $3,500 a month range?
Yeah, I'll comment on the Canadian pricing first, which is - it's more of an IO market for us than the overall portfolio, so on a relative basis, it looks lower but it's really based on the equity. And we believe we have placed strong pricing power by the way in Canada. I mentioned that is what gives us confidence in 2018 and continue to grow the bottom line in Canada on that price and we are at plus 90% occupancy there, so that gives us the opportunity to so do.
Great, thank you.
Thank you. Okay, so I'm glad that you all joined in this morning and want to say, how much we all sincerely appreciate your time, your interest in our call and our comments and in your interest in support of our company. So thank you so much, we look forward to seeing you soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.