Ventas Inc (VTR) — Q2 2018 Earnings Call Transcript

Thanks. Good morning and welcome to the Ventas conference call to review the Company’s announcement today regarding its results for the second quarter ended June 30, 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.

Great Ryan, thank you so much. And good morning to all of our shareholders and other participants and welcome to the Ventas second quarter earnings call. I’m delighted to be joined by members of our Ventas team to highlight this quarter's strong results from a balanced and differentiated portfolio. I will provide an update on our strategic priorities and discuss our improved outlook for the year. Following my remarks, our CFO, Bob Probst, will review our segment performance and financial results in more depth before we welcome your questions. I'm happy to report that we are ahead of our initial expectations after a productive first half of the year. We have executed our strategic priorities of recycling capital from profitable and well-structured investments, improving our financial strength and liquidity, and investing in our future. At the same time, we delivered on our financial commitments including growing our same-store cash net operating income, increasing our operating cash flows and reporting robust financial results. In short, we are doing what we said we would and then some. So, let's start with the results and our improved guidance for the year. We were pleased to grow normalized FFO by 2% to $1.8 per share. Our results benefited from the forecasted repayment of our successful Ardent Loans and related prepayment fees. This investment yielded excellent 12% total unlevered return and helped Ardent grow and achieve its strategic objectives. We were pleased that in the quarter our diversified portfolio grew same-store property cash NOI by 1.3% and full company cash flow from operations reached an all-time high exceeding $400 million. Building on our achievements and strong performance year-to-date are nearly $300 million of Q2 investment activity and visibility into the back half of the year. We are delighted to update and improve both our company-wide same-store NOI cash growth range and our full-year expectations for normalized FFO to $4.2 to $4.7 per share. While Bob will address our senior housing portfolio in detail, I'd like to say a word about performance and prospects in the business. First, we are benefiting from our strategy of partnering with market leaders in our SHOP portfolio. Those select operators who have the scale and skill to provide superior care for seniors and manage well in a challenging operating environment. From a larger market perspective, we were heartened to see that construction starts in senior housing as reported by NIC have continued to improve materially and in Q2 reached their lowest level nationally since 2012. In the second quarter, total national starts were 5,344 units, which importantly was less than half the starts at the construction peak in 2015. If this trend continues, it should over time reverse the current supply-demand imbalance in our favor. We remain confident in the market opportunity in senior housing and are well positioned to maximize the benefits from it. We know that the silver wave of the over 75 population will experience a net gain of 70 million individuals between 2020 and 2035, boding well for our business and giving us confidence in the future while we manage through current operating conditions. Turning to our capital recycling and balance sheet initiatives, I'm happy to highlight two key accomplishments. First, we've already received over $1.2 billion in proceeds from divesting of profitable investments year-to-date. In the quarter, we reported $36 million in gains from asset sales totaling $137 million. Second, this week we extended our $900 million term loan at improved pricing. I want to sincerely thank our loyal banking partners for their continued strong support of our company. As a result of these accomplishments, we have already refinanced or repaid $2.5 billion in debt so far this year, resulting in the best credit profile in our sector. Our outstanding balance sheet and liquidity position enables us to continue to invest in our future growth. I'd like to highlight our areas of focus and competitive advantage. First, let's talk about our expanding university-based life science and innovation business, which now generates $134 million in annualized NOI. Two projects opened this year and two other ground-up developments at Penn and Brown are moving toward completion. These projects are showing strong leasing trends, and we will begin to see the NOI benefit from these projects in the coming periods. We have a robust pipeline of high-quality investment opportunities with leading research institutions that should enable us to continue to expand this business, which we have already grown by 40% since inception and it remains our number one capital allocation priority. We look forward to capitalizing on our momentum with our partner best-in-class developer Wexford as we further build out this exciting part of our business. Likewise, we also continue to invest in the completion of our trophy Medical Office Building adjacent to AA-rated Sutter Health’s new $2 billion hospital in Downtown San Francisco, which is expected to open in 2019. Here too, leasing activity is strong, and we moved from 52% to 82% preleasing in the second quarter. We are pleased that well-recognized health system Sutter Health, with its strong balance sheet, is the primary tenant in the building. In addition, we see some incremental investment opportunities coming into focus, mainly through our in-place relationships. The market is still highly competitive. Domestic and global capital sources remain extremely interested in our asset classes because of the cash flow and demand profile they offer. This interest supports our investment thesis and also proves out the significant value embedded in our asset base. In this environment, we are allocating our time and resources to value-creating investments where we have a competitive advantage, deep relationships, or proprietary strategic insight. One of these unique opportunities arose in the second quarter in connection with Ardent's successful $1.5 billion recapitalization. In completing its strategic recapitalization in June, Ardent improved its cash flow by reducing its cost of debt and streamlined its capital structure. We supported Ardent and made an investment with a good risk-adjusted return by buying $200 million of its bond at a 10% yield. We remain very pleased with our Ardent partnership and investment. The year-to-date performance of the public hospital group, up 25%, and high valuation for the recently announced acquisition of LifePoint Hospital are excellent proof points for the value creation from our Ardent investment. We also want to congratulate our long-standing partner, Kindred Healthcare, for closing on its go-private transaction with two experienced healthcare private equity firms in July. Led by Ben Breier, Kindred is now a financially strong, operationally focused company that will retain and build on its position as a leading national care provider. Finally, Ventas marks its 20th anniversary on May 1. That offers a great moment to recognize the incredible Ventas team for its skill, collaboration, and dedication to shareholders and to each other. Over the last two decades, Ventas has overcome significant adversity, delivered superior long-term results to shareholders through cycles, built a sustainable balanced business with a high-quality differentiated portfolio and best-in-class partners, generated reliable growing cash flows and dividends, and maintained financial strength. We thank all of our shareholders, directors, and partners, as their support and contribution have been essential to our success. Sitting here as Ventas does at the exciting intersection of healthcare and real estate, with a large and growing market, powerful demand drivers, and a great team. We're confident we will continue to thrive and prosper over the next 20 years. With that, I'm happy to turn the call over to my trusted partner, Bob Probst, our CFO.

Thanks, Debbie. In the second quarter, our diversified portfolio of healthcare, senior housing, and office properties grew same-store cash NOI by 1.3%. Let me outline our segment performance starting with SHOP, before turning to overall company financial results and our updated and improved 2018 guidance. Our SHOP NOI performed in line with our expectations in the second quarter, with cash NOI lower versus prior year by 3.1%. Let me unpack that result in more detail. As predicted, the year-over-year occupancy gap in SHOP improved in the second quarter. Specifically, second quarter SHOP occupancy of 87% was 120 basis points below Q2 of 2017, an improvement from an occupancy gap of minus 160 basis points in the first quarter of 2018. Our SHOP operators did a good job competing for occupancy in the quarter, especially given elevated openings of new communities in Q2. As expected, new units coming online in the second quarter in our trade areas increased two and a half times sequentially. This high level of new competition moderated pricing growth, with second-quarter RevPAR increasing 2.1%. Q2 RevPAR included mid-single-digit declines in releasing spreads, as new communities competed on price to achieve lease-up. Meanwhile, operating expenses grew 2.9% in the second quarter. Our operators continue to do a good job managing labor costs. However, to achieve the improving occupancy picture, our operators incurred increased costs of customer acquisition, including higher referral fees and marketing expenses. At a market level, we continue to see NOI growth in our stronghold markets including Los Angeles, Boston, and Ontario. This strength was offset by NOI declines in markets affected by new competition, such as Atlanta, Texas, Chicago, and certain secondary markets. Encouragingly, new construction starts in our trade areas in the first half of 2018 remain at significantly reduced levels, not seen in the last four years. New starts in the first half of 2018 represent just 1.6% of the annualized inventory in our trade areas. Well below the annualized 2% growth rate for the current 80-plus year-old senior population. At this stage in the year, we're pleased to raise the SHOP same-store guidance midpoint by 50 basis points by improving the low end of our range. SHOP same-store NOI is now expected to range from minus 1 to minus 3%, up from previous guidance of minus 1% to minus 4%, with the range dictated by the pacing impact of new deliveries. Also, at our same-store Eclipse Senior Living or ESL has grown occupancy by over 200 basis points, since ESL took over the portfolio in late January. Meanwhile, Kai and team are busy rolling out operational excellence initiatives at the community level. Between occupancy gains and operational initiatives, we expect to mitigate the inevitable disruption in NOI that occurs with asset transitions. Moving on to the triple-net segment, which grew overall same-store cash NOI by an outstanding 4.9% in the second quarter. In-place lease escalations, as well as $2.5 million in cash fees received from the Brookdale lease extension, contributed to this increase. In terms of rent coverage, trailing 12-month EBITDAR coverage in our triple-net same-store senior housing portfolio held steady at 1.2x through Q1, our latest available reporting period. In each of the other triple-net segments, coverage declined 10 basis points sequentially. As rent has increased, while stronger first quarter results in 2017 have rolled out of the trailing 12-month calculation. In our triple-net IRF and LTAC portfolio, cash flow coverage was 1.4x, as expected. We expect our LTAC to generate improving results in 2018 with operational strategies mitigating LTAC criteria, further supported by the financial strength of the newly private Kindred Healthcare. In health systems, our rent experienced some operating softness in the first quarter of 2018 compared to an exceptionally strong Q1 of 2017. That said, its recent acquisitions, winning operating culture, and benefits of scale should produce good results in the balance of the year. In skilled nursing triple-net, which represents only 1% of our NOI, we experienced a continued decline in Genesis's performance given ongoing industry SNF headwinds. With an excellent first half, we're increasing our full-year 2018 same-store NOI guidance range for the triple-net portfolio overall to now grow between 2.5% and 3%, up from the previous range of 2% to 3%. Please note that we have not retroactively adjusted our 2017 cash rent for the same-store pool, but rather used 2017 actual rent received in order to provide the apples-to-apples year-over-year same-store NOI comparison. Our variable office reporting segment, which comprises 26% of our portfolio, increased same-store cash NOI by 1.4% in the second quarter. Let's break out these results between our university-based life science and medical office portfolios. Our university-based life science assets went from strength to strength in the second quarter, drawing same-store cash NOI by 4.4%. Occupancy levels are exceptional at over 97%. Meanwhile, rents in the second quarter were up by 4.2% versus the prior year in the same-store pool. Even more exciting is the performance of the total life science portfolio, which grew NOI by nearly 24% in Q2, boosted by the success of recently opened projects at Brown, WashU, Duke, and Wake Forest. For the full year same-store pool in 2018, we continue to expect very robust life science same-store NOI growth in the range of 3% to 4%. Turning to our medical office business, its reliable and valuable segment generated roughly 20% of our company NOI. MOB same-store NOI grew by 60 basis points in the second quarter. Tenant retention was an excellent 85%, while in-place lease escalators approximated 3%. With the 1.3% growth to the first half of 2018, we expect NOI to accelerate in the second half and continue to forecast a 1.5% to 2.5% full-year increase from our same-store medical office portfolio. On a combined basis, we continue to 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 on to some key highlights for the overall company's financial results. Normalized FFO per share in the second quarter grew 2% to $1.8, driven by company-wide same-store growth of 1.3% and $0.08 of forecasted prepayment income from the earlier payment of our successful Ardent loan. Meanwhile, we strategically recycled capital with year-to-date dispositions and proceeds from repayments of debt investments totaling over $1.2 billion, effectively achieving our strategic objectives for the full year. Proceeds from this capital recycling have principally been used to retire debt, enabling the company to improve its net debt balances by nearly $1 billion in just two quarters. As a result of capital recycling and proactive risk management, our balance sheet is in outstanding health. Our net debt EBITDA ratio now stands at an excellent 5.3 times and our debt to assets is also robust at 36%. Our maturity profile and duration of debt is also terrific with less than $1.4 billion in maturing debt through 2020-2021. Our duration was further extended yesterday through the renewal of $900 million in bank term loans with better pricing in a longer term that exceeds five years. Let’s wrap up the prepared remarks with our 2018 guidance for the company. For the second time this year we are improving our full-year outlook for normalized FFO for fully diluted share because of the confidence in our diversified business, operators, asset quality and mix. We now forecast normalized FFO to range between $4.02 and $4.07, representing over a penny increase in the midpoint and $0.03 improvement in the low end of the range. We are also pleased to raise our total same-store NOI by 25 basis points to a guidance range of 0.75% to 1.5%, driven by higher triple-net and SHOP same-store expectations. The implied second half normalized FFO at the midpoint of our updated guidance is approximately $1.91 per share largely as a result of two factors: one, using $1.2 billion in year-to-date capital recycling at 8.6% GAAP yields principally to retire debt and two, normal seasonality in senior housing, which typically causes second-half NOI dollars to be lower than the first half—a trend more pronounced this year because of expected elevated new openings in the second half. Also included in our FFO outlook is a previously forecasted $0.03 per share Kindred merger fee received in the third quarter. And finally, as is our practice, our guidance does not include any new unannounced acquisitions. To close as Debbie commented earlier, we are doing what we said and then some. The entire Ventas team is committed to do the same in the second half of 2018 and beyond. With that, I'll hand it back to the operator to open the line for questions.

Just hoping we could spend a little time on the SHOP portfolio, the second half guidance implies a modest pick from the second quarter decline of 3.1, what's driving that and can you comment on occupancy trend to-date in the third quarter. I think Bob, you touched on that at the end of your prepared remarks and maybe if you just generally could talk about your thoughts about one fundamental for Probst.

So it's probably easy to look at the back half of the year relative to the third quarter. And at the implied midpoint in the back half, we're expected to be about 3% down on NOI year-over-year, and that's obviously right in line with where we were in the second quarter. We raised the low end of the guidance range with our confidence, having had now half a year under our belt. It was down roughly 1.2% with a strong start to the year and with some better visibility now into deliveries in the year, which are indeed elevated as expected. So, it's playing out pretty much as we thought. Occupancy has been at the better end of our guidance range both in the second quarter and trending early, very early, here in the third quarter to be the same. But the guidance range is put out at the beginning of the year is holding true at the bottom line, and indeed the piece parts are very consistent with where we were last quarter one.

Do you have any thoughts on when the lowest point might occur? If you're hesitant to provide an answer, is it primarily driven by supply factors related to the deliveries that are still pending for the leasing up of those facilities?

Yeah, the range for the back half is really, again, a function of the timing and the impact of new deliveries. So, we saw elevated deliveries in the second quarter. We expect to see the same in the back half of the year, but again, that's a variable that we don't control. And that's certainly something we want to understand before we're going to put out 2019 expectations, so, just a bit too early for that. Of course, thinking longer-term, the starts data that we shared both for NIC and our portfolio are really encouraging. But as we think about 2019, we need to see more of the second half unfold.

Regarding Eclipse, the occupancy gain was quite substantial. However, you mentioned that there might be some challenges due to the operator transition. Could you elaborate on that and also explain what is driving the occupancy gain?

Sure. Well, we always expect and underwrite a transition dip. It's just inevitable, we've done this many times. Like anything, when you move from operator A to operator B, there's going to be a change. I think the team has done a very nice job of managing that. It's one of the biggest transitions certainly in our experience that we've seen. And Kai and team have done a really nice job, to be counter-cyclical, growing occupancy when typically it's down over 200 basis points, which is a great number. And as part of that, now really getting into rolling out the operational initiatives that they set out to do from the beginning, so, it's proceeding according to plan. But there will be disruption, and the plans are in place to manage through that.

I wanted to ask about the Ardent investment and your involvement in their bond rate, as well as the capital they raised through bank loans. Was there any discussion about sale-leaseback opportunities? Do you believe there will be a chance for them to monetize their real estate? Is there a timeline for that? You mentioned something positive about their hospitals in your opening remarks.

Well, you're right that the bank and bonds, it was about $1.5 billion in total capital raise, very successful, improving Ardent's cash flow and reducing its all-in cost of debt. We were lucky to be able to buy $200 million of the bonds, which we think is a good risk-adjusted return, and also is supportive of Ardent, even though we were basically reducing our loan book total by over $500 million. In terms of real estate, as you know, Ardent has doubled and they have taken on some really good opportunities in two markets where they have significant market share in partnership with the leading academic in those markets. And over time, those may be potential real estate investments, but for now, the best approach is to first streamline the capital structure, which is what they did, and reduce the cost of debt. And then bring their operating magic to the two most recent acquisitions which gives us and them opportunities as those assets really get to peak operating EBITDA levels.

That's helpful and then I just wanted to ask you a question on the reported core FFO, and this may just have been a mistake on our part that your guidance did anticipate essentially an $0.08 prepayment fee for the Ardent loan, that was kind of baked in. Because we were looking back and we saw fees, you talked about some Kindred coming in. And I know we didn't capture it on our numbers and I'm just wondering if you could just maybe provide a little more color around that and where it falls in your guidance?

I'll let Bob address that in depth. But we did include it in our forecast, and you'll see that as we stated in the press release, that it was in our original guidance. Perhaps, Bob, can address it in a little bit more detail.

Sure, yes, we highlighted. As you noted, the Kindred fees, $0.03, expect that in the third quarter, back in February in terms of the fees year-on-year. But at the same time, back in February, we highlighted the impact of dispositions including LHP and the loan repayment associated therewith, and there was a $0.10 decline that we talked about which is a net decline year-on-year, in part netted out by those fees that we received in the quarter the $0.08. So they've always been in the guidance, in that bucket if you like back in February. And so really no change there, and it happened midyear as we expected.

Debbie, in your prepared remarks, you highlighted that the Company is tracking incremental investment opportunities. Can you give us some color on what those opportunities are and what property types they're in?

You're right. I mean we do see increasing incremental investment activity coming into focus and most of the things that we are looking at or working on would come from existing sort of proprietary contractual or other relationships that we have, and would be in our major asset classes, more of the same in other words.

And then like the past six months, maybe a year or so. You've been more focused on the development, redevelopment pipeline. Is it safe to say that's where most of your investments will continue to be focused going forward or are you seeing other opportunities to deploy capital into new acquisitions?

Well, that's our principal focus, as we discussed. Because we are seeing a really great pipeline with great credit in some of these leading university life science and innovation projects, so, certainly that's a focus. There may be acquisitions if we find some that make sense and are value creating. But our principal capital allocation focus is in life science with leading universities, and we see great value creation there, that's why.

Debbie, what is the strategy for funding these additional investments? Is it mainly through asset sales, or is it significant enough that you need to consider a broader approach to accomplish these goals?

Well, we're always thinking about capital sourcing. And it can range from asset sales to joint ventures, to other things. The greatest thing that I can report on is that our balance sheet now is at 5.3x, we have great liquidity, and so that obviously provides an asset that can be used to source capital for incremental investment activity as well.

Bob, you often mention RevPOR with an O. I'm curious if you can provide the calculation for RevPAR with an A in the SHOP business.

I don't have it readily available. It's certainly something we can follow up with, Rich, if you're interested. I think the trends will likely be quite similar.

Right, just down in absolute numbers.

Yes.

Relative to O.

Yes.

So maybe you'd talk about that off-line, but it kind of leads into my final question which I just asked on the Welltower call, so - which is do you think - when you think about your multi - your SHOP portfolio and how it compares valuation-wise to more conventional multifamily assets which provide all sorts of good disclosure and all that sort of stuff. As we kind of go through the process of learning more and more about how SHOP is going to exist in this cycle. Do you think ultimately it should be valued about like what multifamily conventional multifamily is or is it reasonable to say that this should be really a discount to the conventional multifamily business over the long haul?

I'm so glad you asked that question because several years ago, we made the case that it should be valued along the lines of multifamily because it really does provide core-like returns and incredible resilience in the cash flows. We did work around the financial crisis, for example, that would suggest that it was materially more stable in terms of cash flows than multifamily over that period of time. And so, I do think you can make a case that it should be a core asset and have cap rates along the lines of multifamily. There is some countervailing data or analytics you could argue, but in general I feel that the resilience of the cash flow profile and the demand profile, both of which by the way are demographically driven, are very similar.

Well, let it be known that you and Welltower agree on some things so there you go. Thank you very much.

I wanted to just touch base; you mentioned in your prepared remarks, Debbie, the LifePoint transaction as a data point, and we also noticed that Envision, a company you guys are probably familiar with, was also privatized in June. Just interest level in participating in the investment or potential ownership in these types of assets?

Well, I do think that our main focus is really showing that the value of the Ardent investment that we've made, given Ardent's high quality and its sort of many HCA-like strategy. And we do believe in the space, but have always said we would be very selective and we have generally been following more of an urban HCA-like strategy with significant market share. So LifePoint, as it's a rural hospital company. And so that's a different animal. And so we like to see the continued interest and activity in the space and always look to participate where we can but with this highly selective focus that we've articulated.

Any comment on surgery centers or the assets owned by Envision?

Well, surgery centers have been a good asset class. They're owned by a number of hospital companies as well as United Health. So, those can be a very good asset class as well. And we own some but not a major business line at the moment.

And then just one of the sort of – more administrative one on the Ardent bonds. Structurally can – are those held by the REIT just as – I would imagine a corporate credit facility?

So, our tax guy's eyes just lit up because you're talking his language. So, those would be, as you inferred, those would be held in a tax for REIT subsidiary.

This is Seth Canetto on for Chad Vanacore. First question, just looking at the triple-net portfolio, it looks like there's nine leases below one times coverage compared to six last quarter? You just gave some more detail into like how large those are maybe what operators there are, do you see any capital restructurings of any of those triple-net operators?

At the present time, we feel good about the triple-net senior housing, and have projected reliable cash flows for the balance of 2018 there. You're right, a couple of the leases modified a couple of basis points over the trailing 12 months through Q1 of 2018 and changed buckets, but overall, very similar performance to where we were last quarter.

Thanks for the incremental details there. And just shifting gears to the acquisitions; I know we focused a lot on the development and redevelopment pipelines and specifically that's centered around the life science and university opportunity. You guys have grown significantly in that arena in the past two years, I believe it's up 40%. Can you just talk about runway there and how large the opportunity is and can you achieve your long-term goal growing with just Wexford?

I'm going to be happy to turn that over to our newest executive, Pete Bulgarelli, who is in charge of our office business.

Excuse me, thanks Seth, it's a great question. Those questions love to have. We promise that we're going to double this business at inception. And as Debbie said in her remarks, we've grown it by 40% in the first 18 months or so. I mean heck, we're not even across except for our one development in St. Louis not even across the Mississippi River yet. So, we see a great runway for growth.

And this is really one area of our business where we are growing with existing leading universities as you've seen and we are also being called by and in discussions with that next cohort of leading research universities. And so, we're excited about that, and the only governor on it really is our own risk management, because we have a great pipeline there.

So for the SHOP portfolio, expense growth is pretty volatile. So I was just curious if you could provide any comments on the kind of drivers there. Is it just timing issues or what kind of makes it volatile?

Yes, great question, because you're right, there has been some quarterly volatility, not unusual. We have noise in there on things like insurance true-ups and so on which I would look at the first half to try to balance it out a little bit and we're sort of in the 2% year-over-year range, which I think is not a bad run rate. And we've talked about the fact that wage pressure is in the 4% range and the way we managed through that is flexing our volume of labor or labor hours, in managing indirect costs. And the operators have done a really, really good job in the first half on that. We're pleased to see that with some more runway. And I've seen some cost of acquisition of new customers i.e. new residents going up a bit as well in that 2%. But that's a pretty good run rate I'd say.

And then just one quick follow-up: can you talk about cap rate trends just across your property types?

Well, as I mentioned because there continues to be really strong interest from all sorts of capital in our asset types because of the cash flow profile we talked about in discussing multifamily, because of the demand profile we talked about, cap rates are staying very firm. And that's why we're really focused on some of the capital allocation priority we enunciated. And we're really focusing on the kind of proprietary or contractual pipelines that we have with some of our partners like Ardent, like PNB, like Wexford, like Atria, et cetera. So, that is where we're focusing because we have a competitive advantage there.

So earlier Bob, you talked about the inclusion of the Ardent fees in core FFO, about the Brookdale fee was excluded and I understand Ardent prepayment was expected, but isn’t the whole point of a normalized figure to remove outliers like the Ardent fee that were 7% of normalized FFO per share that goes away in the third quarter?

Yes, I’ll be glad to take that question so we are leading provider of capital to high quality healthcare companies and part of our business historically has been and continues to be a loan book of business and that loan book generates cash, prepayment fees and other types of fees as do our leases by the way on an episodic basis but are part of our ongoing basis. And so as those items are cash and part of our ongoing business we have historically and continue to include them in our normalized FFO. The Brookdale item that you to which you refer is really a non-cash item that was done as part of our lease extension and is a very different type of item and thus the consistent treatment of those items one is in and one is out.

We also make a clear point of calling out the number two and investors can see it quite clearly and choose to do what they want, but…

But that’s the reason, yeah that’s the reason.

And presumably the Kindred fee will be included in 3Q normalized FFO then?

Yes, and that’s…

That’s correct.

And then just one more from me and kind of an extension of Rich and Luke’s questions but with SHOP now about a third of the company I know I would find it helpful if we could get additional disclosure there on components of expense maybe even new and renewal leasing spreads with that segment I know rental rate growth is pretty stable in low single-digit range. But is this breakout something you could provide us for the second quarter or maybe supplements going forward?

Yes, we in the prepared remarks I did mention the releasing spread at down in single-digits and I think I'm probably one of the few who actually quote that number. I think it's a really important number other industries like multifamily they quote that. We have some maturation as an industry to get to that with some common definitions of price and so on. But I do think that over time we should as an industry strive to be transparent on that.

Thank you.

And what about new spread you mentioned renewals are down a little bit or your new leases are they flat are they up a little?

SHOP new leases. Yes, I mean market is where there is new competition is down clearly.

Debbie on your senior housing triple-net coverage right now covering around one-time EBITDA are we going to see transitions to SHOP and how high you’re willing to take your SHOP exposure?

So look every situation is treated on its own we are happy with the transition that we made from triple-net to SHOP as Bob described VSL and you could see by the leasing velocity that can prove to be a really good decision. And as we look at the forward landscape or any individual decision I would say it really depends on what we see the forward environment to be in terms of what action we could potentially take. So we’re pretty expert at those kinds of transitions and also with those kinds of decisions.

And then a question on merger-related expenses which are going to add back to normalized FFO it’s already well ahead of last year's total you have another $13 million to go – they expect to have in your guidance for the remainder of the year. What is driving this? Because I don’t necessarily think that you’ve been more active this year than last year on merger activity?

Yes, John, transition-related costs are also part of the deal cost bucket and obviously the VSL transition being most notable within that. So that's the primary driver.

So what exactly is that $27 million is it paying internal people, external or it audit changes or…?

All the above indeed. The internal/external costs are associated with making a transition of that nature, legal thoughts and things like that for sure.

And then Rich Anderson brought up the multifamily multiples, I'm wondering if we can get an updated Debbie on your views of age-restricted multifamily?

Interesting, I would say that my views are continuing to evolve as I learn more. It’s a really interesting question. You have things like equity lifestyles which is not really age restricted but it is really a demographically driven kind of business. You have age-restricted apartments which are more of what you are talking about and then you have senior housing. And each of them has their own positives to negatives I think our strong demographically driven reliable cash flow businesses. So big picture we like them but my view is continue to be educated and evolve.

Would you look to end through partnership or do it on your own asset classes?

Well once our investment thesis is fully evolved then I will be able to answer that question.

So my question really is around senior housing and just again your results today, Wells results as well, and they seem to be raising all these questions again of kind of when does those things kind of bottom out. I think at NARIET there was that expectation that things were 'feeling better' but then we get the next 2Q data, we get results and the NIC data also kind of pointing to the fact that the site improved absorption that was through expecting decline in occupancy over the next 12 months. So kind of against that backdrop how do you think your portfolio ends up performing, how do you think about the need to do additional restructuring, et cetera, et cetera?

Well let’s start by saying that we are right in line with where we thought or even a little bit better as we articulated in the beginning of the year and I think Bob has done a great job over the past couple of years and continues to have really good forecast frameworks for investors to think about as they think about the forward environment. And we did talk about the fact that our guidance ranges were in part driven by the pace, the volume and pace of new deliveries which we expected to pick up throughout 2018. So again we feel very much in line with where we thought and I’ll let Bob kind of take it from there.

Well you’re right to say looking beyond NIC has said there will be the negative absorption so that’s one data point. I just circle back to we still need to see the back half of the year and the pacing and timing of deliveries really to make some assumptions around bottoming. But we are where we thought would be.

And the main point the big main point continues to be starts are going down, the number of the seniors is going up and there is a timing mismatch between the deliveries and this increase in the senior population and we are in the process of working our way through that but it will be very powerful on the other side and we are well positioned to take advantage of that. That is the big picture.

But in the meantime again it’s you kind of this 12 to 18 months process of trying - that’s the two factors of somewhat conflicting before everything moves positively. What’s the risk in that period that you do have to do additional restructuring or tenant goes bankrupt because they don't have 18 to 24 months to make it through.

Well as we've talked about before, this is partly why we have a diversified portfolio. It's partly why we have a differentiated portfolio, and we are in a cycle and I think well positioned to work our way through that. And as you saw in 2018, we've improved our guidance.

I think again, it's an interesting time and I do think it's a period where you're going to end up with some have and have not over the next 12 to 18 months.

Well, we feel like we're in a good spot. So, thank you.

You've now seen Ardent's ability to tap at debt markets. I know it seems like a high coupon to us but maybe just like you alluded, Debbie, it lowered that cost debt. Post offering, post and turning down the note to you guys, what's your appetite to provide incremental capital to Ardent? That's one, and then part two is just hospitals in general.

Absolutely, I mean Ardent's average weighted cost to debt was improved significantly with recapitalization. So, you're right about that. And look as in our role as their partner and then our role as a leading capital provider to successful care providers. We are continuing to provide growth capital to them and with over time should there be opportunities that are mutually attractive. So, that's where we stand.

So the cost of debt is 9.75, where would you guys be comfortable, is that raised or lowered, your required rate of returns with Ardent?

So remember, that is with one part of the capital structure. The overall part of the capital structure with bank and bonds is substantially lower than that. So, that's very important for you to understand. And then what was the question?

Just I guess, appetite to grow along with Ardent at this point and then just hospitals in general?

Well, as stated, I think we - if there are mutually beneficial opportunities with Ardent, we are happy to be their partner and pursue them. And in terms of other activity, it's important to see the great interest. And performance of the hospital space this year which is up 25%, but we are continuing to pursue the articulated strategy of being very selective in this space and doing business with the winners, and that's the basis on which we would consider additional opportunities.

So, I was looking back at your supplemental go back to 1Q 2017, you only had one development in SHOP, today you have five. So just wondering what opportunities you see there and in development given the rest of the space kind of pulling back? Do you see opportunities to increase your development in SHOP as you look out two or three years where the supply demand might be?

Well, good question. I think that, as I alluded to, we are focusing on these areas of investment where we have long-standing relationships. Most of those, if not all of those four would be developments with Sunrise and maybe one or two with Atria, and really high demographically attractive areas where we see potentially good risk-adjusted return. And in each of those cases, we are doing those in joint ventures with pension fund capital. So, that part of - the type of investment that I said we can focus on as part of our relationship business.

Other pension funds and private capital, are they concerned about where the fundamentals are or are they looking forward? I mean just trying to understand how the non-REIT players are thinking about.

I can say without qualification that the sovereign wealth types and the pension funds are matching long-term liabilities with assets are wildly interested in senior housing. Because they again, just for the same reason, they see the demographic demand, they see the cash flow profile and resiliency over long periods of time, and that is what attracts them to the space.

And they prefer development over acquisitions or?

I mean, it depends on the investor. It can be both, but they just look right through this timing mismatch that we discussed.

I wanted to ask about Brookdale. Just I know, it’s only been a few months but wanted to know how the operations have been going there and are you still thinking about 15% is the right number for potential portfolio asset sales?

Glad to remind everyone about our mutually beneficial Brookdale deal that we announced last quarter, which extended our leases at least out until 2026. Part of the thesis there is that the new management team is focusing on operational initiatives. And we are trying to support them in that endeavor. And I think it will be best for you to stay tuned as they continue to report. But one would expect it will take some time for those initiatives to take hold but I would encourage you to tune in for their quarterly report.

And have you started marketing any of the assets in that portfolio and if so how's been the interest on them?

We're going to do that over time, we have not yet started. As you correctly point out, part of our deal was not only the lease extension but also the ability to potentially prune the portfolio at disposition rates that are effectively six in a quarter on our rent. And we will undertake that over time. So, we are very happy to be with you this morning. We sincerely appreciate your support, your interest in Ventas. I hope everyone has a great summer. And we'll look forward to seeing you in September. Thank you.