Ventas Inc (VTR) — Q1 2018 Earnings Call Transcript

Thanks, Sarah. Good morning and welcome to the Ventas conference call to review the Company’s announcement today regarding its results for the year end quarter ended March 31, 2018. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. The Company cautions that these forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the Company’s expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Additional information about the factors that may affect the Company’s operations and results is included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 and the Company’s other SEC filings. Please note that quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure, as well as the Company’s supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the Company.

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

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

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

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

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

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

Could you provide some insight into why you chose to retain 100% of the Eclipse assets instead of selling a minority stake? Was this decision influenced by pricing factors? Additionally, could you elaborate on the operational transition? It appears that you've achieved occupancy despite any challenges you may face moving forward; is the transition still a concern?

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

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

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

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

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

And assuming these assets have lower coverage metrics?

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

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

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

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

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

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

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

If I could discuss the Brookdale rent issue, it appears that you begin with $8 million in rent concessions this year, decreasing to $5 million in 2025, which would be compensated by profits. Adding everything up suggests $48 million in rent reductions over eight years. Is it correct to say that although you're not resolving the coverage issue all at once, you are addressing it gradually over time, and by the time the silver wave arrives in 2025, you hope to have achieved adequate coverage or even better? Is that a reasonable perspective?

It is a good way to think about it, and we are trying to create an agreement that benefits both parties, allowing us to support the team's efforts to improve operations. We have always maintained that the best way for Brookdale to enhance shareholder value is by focusing on operations. Therefore, we are in favor of that effort, which is reflected in the pattern of rent credits over time, as you pointed out. We expect Brookdale to focus on improving the EBITDAR of the portfolio.

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

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

And if you don't like — if someone comes in to replace them, what is your possible response to that?

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

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

Right, like if you took over.

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

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

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

Thank you. Bob feels like the LTAC repairman, so I'm happy to address that before we move on. As I mentioned, we aim to be a good partner and want Brookdale to succeed. We believe this is a great outcome for Ventas shareholders, and we've maintained some flexibility in specific situations to keep our options open, which may include certain asset transitions under particular circumstances.

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

Thank you for taking care of my partner Bob.

Look, I called the stronghold markets in the prepared remarks, the LA and Boston continue to perform very well. We’ve seen that literally over the course of the year, and that’s both on top and bottom line, good pricing power, good occupancy, good bottom line momentum. The challenged markets from a slide perspective also are very common themes in Atlanta, Chicago, et cetera. And the performance of those has roughly been as expected, so no surprises really I think from that perspective. What is unique and I have highlighted is the delaying in new openings, which is obviously helpful to give time for absorption to occur, and also very new openings lots of the planning in new starts which is encouraging for the future for us.

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

No, no.

Sorry.

No, no, okay, there is – let's say the portfolio has rough numbers in the 170s of the annual rent about 15% of that could be sold, we get all the proceeds from that and depending on what the proceeds are, we get a credit to Brookdale at a 6 in the quarter yield basically.

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

30 is somewhat related to the second part of the calculation, Jordan. So, all the…

If you sell 480.

Let me try it a different way. Think about it this way. All the rents basically that are now there which stay on the portfolio minus, net proceeds to Ventas times 6.25% could basically certify this achievement.

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

Yes, it all turns on proceeds.

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

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

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

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

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

And your share would be $80 million gross proceeds.

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

All right, thanks for the question. Again let me just recap for everyone. So, there are objective standards for a change in control. Hence, if the change of control occurs then we’ll receive additional protection and enhancements, including lease expansions out to 29 as well as commitments to CapEx and fees. In order to do that, we have provided basically three general objective standards. One is financial results that meet our thresholds. One is reputational, and one is really operational experience in the asset classes. And I’m oversimplifying obviously, but that – those are objective standards principally through a change control would be considered.

Okay. Is there a threshold on the financial covenant?

Yes, there are significant net worth and leverage requirements.

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

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

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

If memory serves, it’s about a thousand dollars a unit a year.

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

Well, we have handful net worth and leverage type requirements. Very typical credit type requirements to know that as I said before that the operator is financially creditworthy to conduct a business that is now care of seniors. And those requirements are enhanced if there is a change of control.

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

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

It looks like SNF.

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

So would that be interesting to you or no?

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

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

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

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

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

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

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

That's the math. Now, regarding the old agreement, coverage has decreased slightly. If you adjust the EBITDA number by about 5 or 6 basis points, it still falls within the range of approximately 1.1 to 1.15 for Brookdale. To answer Juan's question, a $6 million credit might be sufficient to provide confidence in the sustainability of the coverage.

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

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

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

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

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

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

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

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

I want to focus on development, particularly regarding your capital allocation. You mentioned a good start with Sunrise this quarter. Can you discuss the opportunities for increasing development and possibly redevelopment in your portfolio? Do you anticipate that this will continue to grow as a percentage of the portfolio? Additionally, are you seeing more operators approaching you for development funding, especially in seniors housing, given the current dynamics in funding for that sector? I'm trying to grasp the development opportunities available.

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

Yes, this is John Cobb, Mike. I can see that definitely getting there. I mean we have some really good partners with Wexford on the life science side, PNB and others on the medical office side we're seeing some good traction recently. But we do see — because of our reputation and their skill set, we see a lot of great metrics. It's a really good pipeline.

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

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

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

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

Hi, it's Michael Bilerman, Debbie.

Hi, Michael.

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

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

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

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

And then on the Brookdale just I... just wanted to close with this and then kind of brings the conversation full circle. And it’s basically what you said in your prepared remarks, you really did do this via an accused comment that they’re potentially participating rent, but it’s active and ABC clearly what we’ve heard there. It seem that you are appropriately recognizing the trade-off you know from a long-term standpoint of your FFO, trying to get maybe some near-term or for the longer term may not be worth it from an overall share price or realistic managed growth perspective, I mean Debbie does that seem fair? Am I missing anything?

We all certainly appreciate the perspective and thanks, Michael, for bringing it up. I think it’s a really good example of a well-handled transition and how we’ve done it in a way that we feel great about where we took this conversation and the fact that we did in a great way and our teams working collaboratively, we’re very excited about it. We see the further upside. Is that our final question? Okay. So, we want to thank everyone sincerely for being here today for your interest and support to Ventas. We appreciate everything you’ve done to make the last 20 years of Ventas such a great success story. And we look forward to seeing you again here. Thank you.