Ventas Inc (VTR) — Q1 2015 Earnings Call Transcript

Thank you, Dave. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter and the quarter ended March 31, 2015. 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. These projections, predictions, and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties, and contingencies, and stockholders and others should recognize that actual events may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year-ended December 31, 2014, and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that the quantitative reconciliation between each non-GAAP financial measure contained in this presentation 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.

Thanks, Lori. Good morning to all of our shareholders and other participants, and welcome to Ventas' first quarter earnings call. This morning we are happy to share our excellent Q1 and year-to-date accomplishments and results, discuss our strategy in areas of focus, and provide our outlook for the balance of the year. Following my remarks, Ray Lewis will discuss our portfolio performance; and Bob Probst will review our financial results. Then we will be happy to answer your questions. Although we are only four months into it, 2015 is shaping up to be a highly productive and value-creating one for Ventas. Year-to-date, we have closed over $3.5 billion of investments, received almost $0.5 billion in disposition and loan repayment proceeds, made a strategic and accretive investment in the US acute care hospital space, and announced a spin-off of most of our skilled nursing portfolio to create two faster growing more focused companies. We've also selected a name for the new pure play REIT, Care Capital Property or CCP. And we also delivered a very strong quarter in line with our expectations; our enterprise generated normalized FFO per share of $1.18 representing 8% growth from the first quarter of last year. Cash flow from operations increased by 21% in total and 9% on a per share basis compared to the prior period. And our first quarter dividend per share grew in line with that strong cash performance. We believe our recent announcements that we intend to spin off most of our skilled nursing portfolios into CCP, a pure play REIT, as well as our pending entry into the US hospital spaces are innovative decisions that will deliver significant benefits for our investors, lenders, customers, and employees. They also fit squarely with our track record of thought leadership in our industry, value creation, and capital stewardship. The Ventas team sets the bar high for extreme productivity year in and year out with a focus on elevating our enterprise and sustaining the excellence we stand for. Let me recap some of our highlights so far this year; first, capital markets activity, maintaining our commitment to financial strength and flexibility, we accessed the debt and equity markets in January on attractive terms and positioned ourselves for today’s outstanding debt-to-enterprise value of 32%. Turning to capital allocations, we have had a terrific start to the year closing to $3.5 billion in deals so far. First, of course is the completion of our HCT acquisition on January 16. The transaction is accretive and consistent with our strategy; we priced HCT in 2014 in anticipation of the increasingly strong bids we see for healthcare and senior housing assets in the market. So in closing we've been fully integrating the HCT assets and customers into our portfolio. We continue to be pleased with the portfolio's composition of principally newer medical office buildings or MOBs affiliated with excellent hospital tenants and senior housing operating assets managed by quality care providers, all of whom are performing well.

Thank you, Debbie. Our balance in the diversified portfolio of more than 1,600 senior housing, medical office, and post-acute properties continues to deliver strong growth in the first quarter. Same-store cash NOI for the total portfolio grew by 3.2% for the first quarter of 2015 as compared to the first quarter of 2014, and was led by strong growth in the triple net lease portfolio. Let me start with our seniors housing operating portfolio; with the closing of the HCT acquisition in January we now have a total of 305 properties of which 269 are operated by Atria and Sunrise. The total SHOP portfolio generated NOI after management fees of $149 million in the first quarter, growth of 21% year-over-year, driven primarily by the addition of 68 new properties since the first quarter of 2014, and solid same-store performance in our Atria portfolio. Average occupancy in the total portfolio at 91.3% was 70 basis points higher in the first quarter of 2015 compared to the first quarter of 2014. Our portfolio occupancy exceeds the average senior housing occupancy reported by NIC in its Top 99 markets by 100 basis points. NOI in the 234 properties in our same-store portfolio increased about 1% in the first quarter of 2015 over the first quarter of 2014, adjusting for approximately $2.2 million of non-recurring real estate tax credits in the first quarter of 2014, the same-store NOI grew 2.7%. Year-over-year occupancy growth was strong at 60 basis points and occupancy increased in both, the Atria and Sunrise portfolios. Year-over-year rate growth was also strong at 3.1% driven by the Atria portfolio. However, as we told you during the fourth quarter call for both Atria and Sunrise we are seeing some pressure on expenses, particularly in wages, benefits, insurance, and utilities which manifested in a 5.2% year-over-year expense increase in the first quarter. On a sequential basis, the 269 properties in our same-store portfolio performed in line with our expectations for the first quarter. Consistent with historical patterns, occupancy declined in the first quarter versus the fourth driven by lower move-ins around the holidays, the impact of the flu season, and the inclement weather in the northeast; rate was up 2.8% driven by annual rent increases in most of the portfolio and expenses were up 2.2% driven by wage, utility, and other expense items that we discussed when we gave our guidance last quarter. Based on our seasonal trends, we anticipate that occupancy, NOI and margins should increase through the rest of the year.

Thank you, Ray. Let me start with the numbers for the first quarter of 2015. In the first quarter, Ventas delivered record normalized FFO of $387.5 million, an increase of 20% versus prior year, and in line with our expectations. Q1 normalized FFO for diluted share was $1.18 versus $1.09 in 2014, an increase of 8.0%. The strong Q1 growth over 2014 is primarily due to the positive impact of accretive acquisitions in same-store portfolio, NOI growth of 3.2% led by our triple net portfolio. As expected, we benefitted early in the quarter from approximately $7 million in fee income or approximately $0.02 of FFO per share. This solid FFO growth was partially offset by an 11% increase in share counts in Q1 driven by the close of the HCT transaction mid-January, as well as equity issuance under the ATM. Weighted average due to the shares outstanding for the first quarter of 2015 increased to 329 million shares compared to 296 million shares in Q1 of 2014.

Hi, good morning, thanks, Debbie. I was just hoping you could speak a little bit more about the SHOP portfolio, I guess I am too front. First, if you can get us any color on what the HCT portfolio - how that's growing? How we should expect that to impact the same-store pool? And if you could also give us a little bit more color on the current same-store pools for the margin expectations given the comments on costs pressures.

Juan, this is Debbie, I will just take one small part of that and turn it over to others but the HCT is performing in line with our expectations; we would expect that NOI to grow on a moderate basis over the course of the year. It will not be in same-store this year and will appear in same-store in the second quarter of 2016 when we've earned it for a full-year. So Juan, the current same-store I'll turn it over to others to answer your question.

Juan, it's Bob. In terms of the margin question on same-store, you saw a decline in the first quarter that was in line with our expectations, you have the seasonal decline in the quarter together with the wage and other cost inflation we had anticipated. In fact, it was exacerbated to some degree by flu and weather in certain parts of the region but as we think about the balance of the year, we believe occupancy will pick up really beginning in the second quarter and accelerate through the back half, that will drive in our minds the operating leverage together with the rate we saw in the first quarter, it's about 3.1% year-on-year to really try to hold those margins for the full-year. So that's really what's in our outlook for the same-store guidance.

Great questions, so as you know we own the three high-quality hospitals in the UK, I would imagine though that the Ardent external growth opportunity is going to be principally if not exclusively domestic. There are a couple of different categories of potential acquisitions that we would hope to work with our Ardent; one is a classic purchase of not-for-profit hospitals, and that is probably the biggest kind of pipeline, it's what Ardent has been good at in the past, and certainly it's the path that many of the public hospital operators take advantage off because they will buy these assets and make them more efficient. Another avenue would be potential spin-offs or sales by public companies of some of their hospitals, and a third might be the acquisition of the other smaller hospital companies that are for-profit. But I do see the first one with the not-for-profit to own the majority of hospitals in the United States as probably the principal pathway to external growth with Ardent.

Good morning, a couple of questions are you still targeting a $0.53 to $0.55 dividend per share based on that account?

Yes, Nick, we are.

Hi, good morning. I wanted to ask you in your Form 10, the NOI from CCP was looking like it's around $290 million to $295 million, and I think the guidance is $315 million to $320 million and is that just reflecting the 12 that you acquired in the quarter and we will get spun to them or is there some other way to get that NOI number?

Hi, it’s Lori. It's not only the 12 but it also the 18 assets from HCT that will be coming over, so there are a total of 30 that were purchased subsequently in 2014 and so when you add those, that’s how you get to the range.

You know, people are making above that in our buildings, I would say that it does sort of push up the spread - the spread needs to be maintained, so it does have some upward pressure on wages in our buildings.

Can you give us some color on the potential not-for-profit hospital transaction, well I didn't take those hospital operations over and convert them to for-profit?

Yes, I mean this is a well-trodden path in the hospital business; I'm going to guess - again, the majority hospitals are not-for-profit, many of them have lower margins but good footprints in their markets. And what the for-profit hospitals will typically do is either buy one of the hospitals and then make it more efficient or they will partner. Yes, in that example, Ardent would go in and be the new operator and over time increase those margins through driving efficiencies.