Ventas Inc (VTR) — Q4 2018 Earnings Call Transcript

Thanks, Michelle. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the year and quarter ended December 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 meanings 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, the quantitative reconciliation between the non-GAAP financial measures referenced on this conference call, and its most directly comparable GAAP measures, as well as the company's supplemental disclosure schedule are available on the Investor Relations site on our website, www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the Company.

Thank you, Juan. We're very happy to have you join us on this side of the table for your first call. And good morning to all of our shareholders and other participants, and welcome to the Ventas year-end 2018 earnings call. I'm delighted also to be joined on today's call by my outstanding Ventas colleagues. In 2018, Ventas extended its two-decade track record of sustained excellence. We delivered positive total return to our shareholders, substantially outperforming both the REIT index and the S&P 500. We increased our dividend, harvested proceeds from successful investments that we redeployed to enhance balance sheet strength and invest in future growth. We added selective premier private pay assets to our portfolio and we built a high-quality research and innovation development pipeline exceeding $1.5 billion with leading research universities. Importantly, we also enhanced and expanded our relationships with key industry partners; Wexford, TMB, Ardent, Atria, and Sunrise during the year, and we crafted new beneficial arrangements with care providers, including Brookdale and ESL. In addition to achieving these strategic objectives, we also delivered on our financial goals. 2018 normalized FFO per share was $4.07 at the high end of our improved expectations on a best-in-class balance sheet. During the year, we were gratified that our team and our company were recognized repeatedly for our track record of our performance, our significant contributions to the industries where we have a major presence, and for our leadership in environmental, social and governance matters. Along the way, our Ventas team remained strong, smart, and unified. While I'd love to elaborate on our 2018 accomplishments, they are well described in today's release. Instead, allow me to outline our expectations for 2019, highlight some of our key opportunities for the year, and describe our commitment to returning to growth. We entered 2019 on a strong foundation. We expect 2019 normalized FFO to range between $3.75 and $3.85 per share, assuming no acquisition activity. We also anticipate that our diversified portfolio will grow same-store cash net operating income year-over-year. We expect 2019 to be a pivot year in our transition back to growth following a multi-year period of strategic improvement in our portfolio quality and mix from the disposition and receipt of loan repayments totaling $8 billion. We used the proceeds of these transactions to substantially improve our portfolio and tenant mix and replace lower quality assets and tenants with high-quality health systems and research and innovation properties with highly rated leading universities. While the specific timing of our return to growth following 2019 is difficult to predict, the building blocks are clear; deliver organic portfolio growth when senior housing operating conditions improve as other business lines continue to grow, capture the benefits of our research and innovation business and development pipeline, utilize our financial strength and flexibility, and reignite our long-standing history of completing successful accretive acquisitions. Let's talk about those building blocks in turn. First, looking at senior living trends nationally, we are very encouraged by the recently reported continued improvement in Senior Living starts, which have reached their most favorable points since the third quarter of 2012. As starts continued to moderate, demand for our product ramped to its highest level ever in 2018. The 75-year to 81-year-old contingent is growing 4% per year for the next five years, and the 82-year to 86-year-old cohort begins to grow over 3% per year after 2019. Assuming these trends continue, we anticipate a bottoming in senior housing so that the supply-demand equation moves in our favor in the future creating a powerful cyclical upside. Potential increases in the penetration rate would incrementally improve this picture. Second, we've enjoyed significant growth in our university-based research and innovation business today from the original portfolio we acquired in late 2016 and the delivery and lease-up of additional properties. We expect research and innovation growth to continue in 2019. Building on our momentum, we have today announced the extension of our collaborative partnership with Wexford until 2029 and the creation of a strong development pipeline exceeding $1.5 billion in projects with elite research universities that will accelerate our growth in this high-quality sustainable space. The pipeline cements our leading position in the market and demonstrates again our ability to acquire and grow a differentiated value-creating business. Our robust pipeline of developments with top-tier research institutions contains about 10 expected projects, roughly half with existing university relationships and half with new ones. Pro forma for the announced development pipeline, our investment in high-quality new real estate leased by leading research institutions will exceed $3.5 billion, more than doubling our original 2016 investment and NOI from research and innovation investments would represent about 10% of Ventas NOI. The pipeline projects have excellent risk-adjusted returns with expected unlevered yields of between 6.5% and 8% at stabilization and significant pre-leasing, creditworthy tenants and long-term leases. Today we announced the first development in our pipeline, a $77 million project with Arizona State University, a highly rated public research and new relationship for Ventas and Wexford. The project will be fully lab-enabled and principally used for biomedical discovery and innovation and health outcomes. It is 50% leased to ASU and should open by the end of 2020. With best-in-class developer and manager Wexford, we look forward to meeting the needs of leading universities who want powerful knowledge communities on their campuses to supercharge research, innovation, and economic activity. Our third building block of future growth stems from our financial strength and flexibility. During 2018, we paid down and refinanced debt totaling $3.4 billion, so we entered 2019 with an industry-leading credit profile, limited near-term debt maturities, terrific liquidity, and capital access. Finally, current market conditions are becoming more conducive for creative external growth. Our team continues to evaluate investments across our verticals. Our strong relationships in all our business lines provide a competitive edge in acquisitions, and we intend to be proactive and opportunistic to increase investment activity. However, because investment timing and volume are unpredictable consistent with our historical practice, we have not built any acquisition activity into our projections for 2019. In conclusion, with nearly 20 years of 23% compound annual return to shareholders, we are happy with our 2018 accomplishments and financial performance. We are introducing 2019 guidance that is consistent with our previous statements to you and most importantly we are confident in our positioning for another 20 years of growth and success. Now, I'm happy to turn the call over to our CFO, Rob Prob.

Thank you, Debbie. I'm happy to report another solid year performance from our high-quality portfolio of healthcare, seniors housing, and office properties. Our total property portfolio delivered same-store cash NOI growth of 1.2% for the full year 2018, above the midpoint of total company same-store guidance. In 2019, we expect our total portfolio same-store NOI growth to range between 0% and 1%, benefiting from diversification of asset class operator, geography, and business model. Let me detail our 2018 performance in 2019 guidance for our properties at a segment level starting with triple-net. We were very pleased by the performance of our triple-net portfolio which grew same-store cash NOI by an excellent 0.6% for the full year 2018. In the fourth quarter, triple-net same-store cash NOI increased to a solid 2.1%. Across our total triple-net lease portfolio trailing 12 months EBITDA cash flow coverage for the third quarter of 2018, the latest available information was stable from the prior quarter at 1.5 times. Within that, seniors housing remained flat at 1.2 times while LTACs remained consistent at 1.4 times. As we predicted, performance at the assets for our Kindred LTACs improved in the second half of 2018 with operational strategies taking hold to mitigate LTAC criteria. We expect this improvement to continue in 2019. Also, Meditech just recommended a rate increase for LTACs recognizing their value in the healthcare delivery system. Meanwhile, Ardent's third quarter 2018 results were strong and the fourth quarter showed continued momentum. Ardent recently filed for an IPO. Ardent's rent coverage remained robust at 2.9 times, and hospital Medicare rates increased approximately 3% effective in the fourth quarter of 2018. As we look at 2019, triple-net same-store NOI is projected to grow, albeit at a more modest rate. Rent escalators are assumed to be partially offset by expected lease modifications with certain smaller senior housing operators where rent coverage and credit is challenged. Though we have multiple potential approaches to these situations including operator and business model transitions, our guidance at this stage assumes a $10 million NOI reduction in our triple-net same-store pool equating to a 130 basis points year-over-year same-store impact. In addition, the lapping of the 2018 Brookdale lease modification lowers triple-net same-store NOI growth by 70 basis points in 2019. On these assumptions, we forecast that our overall triple-net portfolio same-store cash NOI will increase between 0.5% and 1.5% in 2019. I would highlight that guidance does not include any of these modifications for our portfolio of 26 communities managed by holiday. These assets represent only 3% of our company's NOI with approximately $60 million in annual contractual rent, which is fully current. Holiday has recently entered into a variety of transactions with its other landlords. In our case, we have a wide array of possible options and many tools and previous experiences at our disposal to obtain an optimal outcome if we believe a transaction is appropriate. Importantly, we believe that in any transaction we'd be made substantially economically whole, and any would be immaterial to Ventas. Moving on to our senior housing operating portfolio, to summarize, our 2018 SHOP results were in line with our expectations both for the fourth quarter and full year. In 2019, our SHOP guidance at the midpoint represents a year-over-year improvement relative to 2018 so we continue to work through the near-term supply-demand mismatch. And as we look beyond 2019 we're excited about the powerful upside opportunity in seniors housing and in our excellent market position. Let me unpack each of these topics in turn. In 2018, our SHOP full year same-store NOI growth was minus 2.1%. While year same-store occupancy in 2018 declined by 80 basis points versus 2017, driven by the cumulative impact of new deliveries in select markets. RevPAR growth through for the year was 1.9%. Operating expenses rose 2.5% with wage growth partially offset by cost controls. Positively, the year-over-year occupancy gap continued to narrow to minus 10 basis points in the fourth quarter, so new deliveries continued to pressure rate. Q4 expenses were up 3%. At the bottom line, Q4 same-store SHOP cash NOI declined 3.5%, in line with our range of expectations. Turning into 2019 guidance, as we previewed on our Q3 call, we expect full year 2019 SHOP same-store cash NOI to range from minus 3% to flat. At the midpoint, this represents a 60-basis point improvement in year-on-year performance in 2019. Please note our 2019 same-store pool now includes 74 assets operating by ESL. We forecast same-store occupancy in 2019 will range from flat to down 50 basis points for the full year. We expect new deliveries in 2019 to be at a similar level to 2018 as we digest the high level of inventory initiated several years ago. In terms of rate, we continue to see healthy increases on in-place ranch hand care for existing residents. Encouragingly, the majority of the 2019 rate letters have gone out with increases that exceed 5%. That said, price competition for new residents is expected to result in negative rent-releasing spreads in a high single-digit range. Overall, we expect RevPAR growth to the year to approximate 1%. We forecast operating expenses to increase in the 2% to 3% range with continued wage pressure, partially offset by strong cost controls and more modest incentive management fees. Yearly reading Q1 of 2019 suggestive flew impact would be more modest than 2018 severe elite levels. Extreme weather conditions in many parts of the country at the start of the year may also affect the first quarter. Finally, as we look beyond 2019 we're excited about the very positive trends in new construction starts together with accelerating demand. The implication for positive occupancy and NOI gains from this data supports the powerful upside we expect in seniors housing. To finish up the segment discussion, let's turn to our office reporting segment which represents approximately 27% of Ventas's NOI. For the full year 2018, office same-store cash NOI increased by 1.7%. Within office, the RNI portfolio performed very strongly in 2018 and reached the high end of our guidance range by delivering full year same-store cash NOI growth of 4%. Average revenue per square foot increased 4.9% and occupancy was an exceptional 96%. The same-store pool on the fourth quarter RNI increase same-store NOI by an outstanding 8.6% driven by continued execution on our lease-off assets. In 2019, we expect attractive full year same-store research and innovation NOI growth in the range of 3% to 4% and total RNI portfolio NOI growth to exceed 7%. With the number of new developments coming online in 2019, we expect the RNI portfolio NOI to really begin to accelerate into 2020 and beyond. Turning to our highly valuable medical office business, MOB same-store cash NOI increased by 1.1% for the full year 2018. Tenant retention in 2018 was strong at 80% and same-store occupancy improved sequentially in the fourth quarter. In 2019, we expect 1% to 2% cash NOI growth from our same-store MOB portfolio. Guidance assumes occupancy increases through new leasing into the strong retention rates and less square footage expiring than in the prior year. The total MOB portfolio is expected to benefit from the opening in 2019 of our new MOB developments in Downtown San Francisco, which is now over 80% pre-leased to Sutter Health. On a combined basis, our same-store office portfolio of research and innovation properties and MOB assets is expected to grow cash NOI in the range of 1.5% to 2.5% for the full year 2019. Now, onto our overall company financial results. In 2018 we delivered normalized FFO of $4.07 per share matching the high end of our guidance range. Adjusted for Q4 natural disaster impacts, our GAAP net income and net read FFO results were also in line with expectations. Meanwhile, we successfully recycled $1.3 billion in capital and built a balance sheet that has the strongest in the sector. In 2018, we proactively refinanced near-term debt to manage future interest rate risk and increased average debt duration by nearly one year to seven years. At year-end, net debt to adjusted EBITDA was 5.6 times. Fixed charge coverage an exceptional 4.6 times and the debt enterprise value was 34%. We have also enhanced our supplemental disclosure package to incorporate feedback from investors and analysts as well as industry best practices. We welcome your ongoing feedback. I closed out the prepared remarks with our full year 2019 guidance for the company. The key components of our guides are as follows; net income is anticipated to range between $1.23 and $1.38 per fully diluted share, normalized FFO is forecast to range from $3.75 to $3.85 per fully diluted share. We expect portfolio same-store cash NOI will range from 0% to 1% and net debt to adjusted pro forma EBITDA is expected to stay flat at 5.6 times by year end 2019. Last quarter we highlighted that 4Q 2018 guidance annualized of $3.76 per share and normalized FFO was a good run rate for 2019. Today's 2019 official guidance is in line with our first read discussed last quarter but the 2019 range of $3.75 to $3.85 per share or $3.80 at the midpoint. The 2019 normalized FFO guidance is explained by three drivers. First, underlying total property NOI is expected to grow modestly with solid organic growth in multiple asset classes, largely offset by the impacts of the supply-demand cycle and senior housing. Second, we expect to recycle $500 million in asset dispositions in receipt of loan repayments into funding $500 million of developments and redevelopments, principally behind the RNI pipeline. This capital recycling is diluted in 2019 but delivers strong future growth and value creation. And third, we expect higher interest expense in 2019 from higher rates and incorporate $0.02 in incremental leasing expenses from a change in lease accounting standards effective starting in 2019. Finally, as is customary, guidance does not include new acquisitions and also assumes approximately $361 million weighted average fully diluted shares. In conclusion, we are pleased with our performance in 2018. However, the Ventas team is intently focused on together delivering on our 2019 commitments and on our return to growth. With that, I'll ask the operator to please open the call for questions.

Thanks. What's assumed in the guidance for the timing of the asset sales and the loan repayments?

The $500 million in dispositions and loan repayments is really backend weighted. The loan repayments open really beginning in the summer; sorry, guys it's really the midpoint of that back half.

Okay, thanks. As you think about 2019 being a pivot year, where will you enter 2020 on a run rate basis from a quarterly FFO perspective? Obviously, the midpoint suggests $0.95 a quarter but it will be variable given those loan repayments and contributions from development and redevelopment.

Yes. So, you're right to point out in terms of phasing for the year quarter-to-quarter, we certainly would expect in the second half sequentially to see lower FFO per share and that is indeed the case here. I wouldn't say wildly different, but it does trend down over the course of the year based on the time of the dispositions which again, are uncertain. So, it's hard to say exactly quarter-by-quarter what that's going to look like.

Thanks. Is the return to growth more of a 2021 comments in 2020?

Nick, as we said, we're intently focused on returning to our historical growth and the timing is not easily predictable within a specific quarter or so. But we know we're going to get there, we know what we have to do and we know how to do it. So I feel good about that.

Good morning. You mentioned that your team has been underwriting acquisitions. I know you have nothing in guidance. Where's the team most active? Is it senior housing, MOBs and other segments?

Well, clearly, we've been very busy building this great research and innovation pipeline, and I think John Cobb and his team for that. In terms of looking forward, I would say there's a combination across our verticals, a combination of regular way type potential investments as well as more opportunistic type things that may come into focus over time.

Okay. And then on Wexford, the 10 projects you've identified, is that kind of the lifespan of the contract being extended to 2029 or is it kind of just what you have in the near-term kind of lined up?

Yes, it is, John. It's in the near term. It's not in the next 12 months.

It's in the next couple of years.

So what do you think you can kind of do per year? Like two or three of these projects? And get runway?

Well, the $1.5 billion typically takes 24 months, 18 to 24 months to start to finish, to open the building. And then a couple of years to stabilize from the air depending on they are pre-leasing; so that's how you should think about the phasing of the $1.5 billion.

Good morning everyone. I'm following up on Wexford. You mentioned that it takes 18 to 24 months from start to finish. Can you provide an estimate for future project starts this year and next year? The disposition guidance indicates $500 million for development and redevelopment, but based on your current pipeline, it seems like you're not planning for that level of spending. It looks like you might have only another $250 million or $300 million of projects lined up, potentially starting this year. Could you give us some insight on that?

Just directionally I would say some starts in 2018, the backend weighted and then a ramp in 2020 and some spend thereafter.

I'd build on that and they can turn to the $500 million of development or redevelopment spend forecast this year, call it 70% of that is in fact development. And indeed, the majority of that is behind the pipeline just announced. So really this is about accelerating that pipeline beginning of this year.

Debbie, I wanted to revisit your comments about external growth. You mentioned that current market conditions are favorable for creative external growth. I'm curious why there has been limited activity regarding larger portfolio acquisitions in the past year, especially since some have traded. To what extent did your cost of equity play a role in this situation? Additionally, considering where the stock price currently stands compared to its low point in 2017, how is this impacting your perspective on pursuing accretive acquisitions?

Right. And well, as I said, I mean, we're excited about the investments we're making in Research & Innovation. I do think the environment is more conducive and it really is around the fact that we may be seeing a slight upward drift in cap rates, and therefore rewarding our patience coupled with an improved cost of capital. And then there are certain, again, more opportunistic things that come and go and where perhaps over time those could become more interesting to us. So it's a variety of factors.

Just one last question, Bob. I wanted to follow up. When you provided guidance for the Triple-Net segment, you mentioned some lease modifications with senior housing operators. However, I believe you indicated that this did not include Holiday. Is that correct?

That is correct, yes.

I understand you mentioned that there are various scenarios concerning Holiday, but you anticipate being largely economically whole. However, I’m curious about the significant straight-line rent tied to the lease. How should we view the distinction between an economic issue and a GAAP FFO issue, considering there might be a possibility of a straight-line rent reduction if the lease needs to be restructured?

I’ll address that. We have a variety of options and many possible scenarios to consider. As you mentioned, we are focused on ensuring we are economically whole. Our structured guarantor has seen an improvement in credit due to other transactions. Right now, we are analyzing the situation from an economic perspective, and the GAAP impacts will follow based on whether we proceed with a transaction and what that might look like. The GAAP results will depend on any transactions we undertake.

I wanted to discuss the timing of deliveries. It seems some of the delivery dates have been pushed back a bit. What are you observing in terms of construction, and how do you anticipate the delivery schedules may change over the next one to two years?

In terms of deliveries, we analyze the NIC data and adjust for risks based on our past experiences regarding delivery timelines. This trend has been extending, meaning it has been taking longer than usual. We were quite precise in our forecasts for 2018 regarding these deliveries. Looking ahead to 2019, we anticipate similar levels of new deliveries in our portfolio as we experienced in 2018. The downward trend in starts is encouraging, as it provides us with some visibility into 2020. Naturally, this will depend on the timing of deliveries, but we expect a decrease in the number of deliveries in 2020, based on the positive trend in starts. This context contributes to our observations about improving trends in Seniors Housing over time.

I would like to follow up on the business regarding wage issues. You mentioned that expenses could increase by 2% to 3%, which may include slightly higher wage growth. How confident are you that the wage component won't cause overall expense growth to rise in 2019?

Yes, this has been a consistent theme, Steve. I think I was asked the same question this time last year. Wages have clearly been under pressure, and there's no doubt about that. We are all aware of the tight labor market, minimum wage, etc. The operators have done an outstanding job of controlling costs, whether through their business model, operating model, staffing, or managing indirect costs. For instance, in 2018, our operating expense grew by 2.5%, which falls right in the midpoint of the range we've provided for 2019. Our operators believe they still have opportunities for further cost control, which is definitely necessary given the wage pressures you mentioned.

And then for the final question on the R&I business, regarding the ASU deal, it seems that half of that will be leased to the university. Do you expect that the other half will go to traditional life science tenants, or do you anticipate the university will eventually take over the other half? Also, how does your prospect or pipeline look for leasing the remaining space in that building?

Sure, this is John. Historically, we target the private sector as you mentioned, but we have also had instances where the university takes additional space. This recently happened at our Washington building that we just completed and successfully filled. So we target both sectors and our prospects are positive.

Thanks for taking my question. Really fast, something I got this morning that I didn't know the answer to. 12% of your SHOP in the fourth quarter was outside of the same-store pool. And I think I modeled this wrong. First, you have that new line, the 16 properties intended for disposition, on page 2. I'm guessing that's outside of the same-store pool?

Yes.

That's correct.

Any sense of how that portfolio trended in '18?

Sure. First, I want to highlight that the ESL assets included in the full-year pool for 2019 were not part of the pool in 2018 as we transition them. This is the main factor, contributing to 80% of our assets. Additionally, we have some assets actively being marketed for disposition, as we call it. In the Seniors Housing sector, these may be located in markets with higher supply, and the trends are likely to reflect those market conditions.

I don’t want to assume anything for you, Bob, but it seems that if you take a look, there's only $1 million of NOI and $20 million of revenue, which likely indicates that the portfolio of assets was quite challenging in 2018.

Those have trended down very consistent with the market.

And then my second one, you mentioned ESL. If you broke your same-store portfolio in '19 between ESL and non-ESL, would there be a difference in the expectation for performance?

And perhaps a chance to discuss ESL a little bit. The last call we mentioned, they stabilized. We saw good fourth quarter from ESL really on the cost side in particular, getting their operating model in place. So nice stabilization of performance there. In terms of the impact in '19 in the same-store pool, that's a positive impact to the overall by about 60 basis points in the same-store pool overall. So put another way, you can adjust the same-store midpoint by that amount if you excluded it.

Got it. So there is an easier comparison where your SHOP can perform better than a typical SHOP portfolio in the US due to the ESL portfolio.

We expect this to have a positive contribution, which was our intention when we moved the asset.

Good morning. In your supplement, you provided what looks like a new line of 8% to 12% range and stabilized returns on incremental capital.

Yes.

Just clarify, is that development yield or an IRR figure?

It's an unlevered yield on incremental capital, John. Good morning. I'm pleased that people are noticing some of our useful additional disclosures, and I'm happy it's proving helpful. Essentially, that reflects the unlevered yield on incremental invested capital at stabilization.

And is that pertaining just to redevelopments or does that include developments alone?

That's the redevelopments, John. Specifically on that page, you'll see at the bottom for the redevelopments. Developments, we show expected stabilized yields specific to the projects.

I think previously you stated that your life science land bank can provide up to $2 billion of developments. And in today's press release, I think $1.5 billion. So, besides the ASU project, what was incrementally new as far as projects that you agreed upon?

And one thing we did say is that with the 10, sort of half are with new relationships, roughly half with existing ones. I'm glad you remember that we do have a land bank with some of our better universities that could support about $2 billion of development. And to tie that altogether...

The half rule of thumb also applies to the land bank we've mentioned, with about half of it being allocated to this new pipeline. This still presents an opportunity.

Okay. And then Debbie you mentioned on an answer to a previous question that opportunistic things come and go. Can you just maybe provide some more color on that, does that this specifically mean public opportunities?

Right. I mean almost by definition, opportunistic is a little bit come-and-go, to use your words. It is more expansive in terms of things where we have a unique insight or we have a unique relationship that we can employ to capture an opportunity that is unique.

Thank you. Good morning. Could you clarify on the ESL piece? Did you say it's a 60 basis point positive contribution to the overall or just to the SHOP piece?

To the SHOP same-store piece, not overall company.

Okay. I thought so.

Yes.

Regarding the trend of SHOP NOI throughout the year, we discussed the sequential trend in perhaps FFO. It seems like your most challenging comparisons are likely in the earlier part of the year, so I would anticipate some gradual improvement as the year progresses. Is that how you are viewing it?

Actually, we think it's likely to be pretty consistent throughout the year. Forget seasonality, I'm just seeing year-over-year performance. Some of the things notable last year in the first quarter were the flu. This year we have, as I said, an easier flu albeit above normal levels, but severe weather is kind of a new factor in the mix in Q1. But as we look out over the course of the year, I don't see anything that spikes any particular quarter, frankly on a year-over-year basis.

Are there any specific segments emerging with better or worse acquisition opportunities? Has your interest in Senior Housing increased at all, considering we are nearing the ramp and exploring the demographics and potential for penetration?

This is John. I think it's across the board, we're seeing in all the sectors that we look at.

Is there anything that you could point to that's driving that? Is it just more willing sellers or prices or...?

I think we are seeing a slight increase in yields, which is making some of the opportunities more attractive, though sometimes deals just appear in the market.

For Senior Housing, are you seeing better supply net demand dynamics in major metro markets versus secondary or suburban? And really how economically viable is Senior Housing in markets like New York City and San Fran where costs seem somewhat prohibitive?

In terms of supply and demand, it's really a discussion that varies from market to market. In the past, I've mentioned some of the major markets like Atlanta and Chicago, where we continue to see a significant supply-demand dynamic. Secondary markets show a noticeable impact regarding supply; for instance, smaller markets like Salt Lake City experience it as well. Ultimately, it’s a case-by-case analysis. Looking at the overall trend, it's encouraging to see a downward trajectory in starts, especially as we approach the end of 2020 with improving delivery expectations.

Okay, got it. And just quickly from my second one. Could you just talk about the West Coast strategy and the expanded relationship or continued with PMB, and ultimately how Sutter is progressing and any updates there?

I would say that we are actively managing our West Coast assets. We have been fortunate to partner with PMB, a highly regarded West Coast developer of quality medical office and outpatient facilities, and we recently extended that partnership. It has been a very positive experience, and they continue to present us with a solid pipeline of development opportunities through our exclusive arrangement. Sutter, as you mentioned, is one of those opportunities. I visited it during NAREIT, and it looks great and is ready for occupancy, conveniently located across from a new $2 billion hospital that Sutter will be moving into shortly. We are excited about this project and look forward to taking investors there as soon as possible.

This is Seth filling in for Chad. My first question is regarding the dispositions. Do you have an update on the $30 million of rent linked to Brookdale? Is that included in the $500 million disposition guidance? Also, have you identified those properties, and can you provide any insights on the timing or expected yields?

Yes. So good question. So, as you recall, as early in 2018, we get a very attractive arrangement with Brookdale that extended our leases and also targeted about $30 million of rent for disposition, added 6.25% yield to Ventas. We have identified an early tranche of those potential dispositions and that is part of the $500 million to which Bob referred. And we're at the very early stage of marketing that portfolio and that's where we stand and that will continue to improve the overall quality of our portfolio and be helpful to Brookdale as well.

You know, I would add, the loans are, I call it $300 million, $350 million of that overall total.

Loan repayments represent the rest of it. Yeah.

Got it, thanks. When we look at last quarter and discuss your preliminary SHOP outlook, it was similar to 2018. It appears that the upper end of that range has improved. Was this based on the strong performance of ESL, overall supply-demand dynamics, or is there any additional information that gives you confidence in the potential for improvement in 2019?

Yes, great question. I'd highlight a few things and this dramatically applies not just to '19, but as we think about '20 and beyond. One of the things we have seen is solid occupancy. And I noted 10 basis points gap versus prior year which had narrowed throughout the year in 2018. And in fact, sequentially we grew occupancy in the fourth quarter for the first time since 2015. So there is something going on that's very positive on the occupancy side. I think it's market share gains and penetration. But that's really one of the things we find very encouraging. ESL you rightly point out, is another. And then the third, I would highlight is redevelopments. We have redevelopments in our same-store pool. I mean, we are seeing some lift from the redevelopments in '19 and in the '20s. So to give you a few of the ideas that gave us that confidence and the midpoint improving in '19 and then beyond.

Good morning and thanks for the added disclosure throughout the stuff, really appreciate it.

Right.

On the external growth front, earlier you mentioned pricing for deals has drifted up, that was on Nick's question. Not sure if that was specific to certain healthcare real estate asset class or just a broad comment, but would you care to maybe quantify that rise with specific emphasis on the MOBs? Have they may be moved up to 20 bips, 25 bips over the past six months, nine months?

We are beginning to notice a slight increase, which is occurring across several asset classes. I believe you are on the right track.

Okay, fair enough. I don't think we've discussed Ardent in detail yet, but in the past you expressed a strong interest in expanding that platform. There was a recent acute care deal awarded outside of the US. I'm curious if you've considered that and if you're noticing any hospital or acute-care opportunities within the U.S.

High-quality health systems, like HCA, have had opportunities to perform well. We hold a strong position in the health system market, which is substantial. We are interested in growing our business in this area if the right opportunities arise. From the outset, we have maintained that we will be very selective with our investments in this sector, as we have been thus far. We will remain open to opportunities and believe we are well-positioned to take advantage of them in a disciplined and selective manner.

Are you hoping for any international acute care opportunities?

We have looked at acute care opportunities abroad over time, and it obviously depends on the market and the yield after currency and taxes and whether we think it's a good risk-adjusted return. But we have looked at opportunities outside the US and quality health systems over time.

I have one more question. I understand there have been some accounting changes recently, which makes this somewhat cosmetic, but General and Administrative expenses have noticeably increased over the past few years while our asset base has stayed relatively stable. I realize this will be affected by accounting changes again this year. However, I was hoping you could provide a suggestion for a reasonable growth number on last year's G&A line item, not guidance, just an estimate of what we might expect this year. Thank you.

Certainly, I'll address that. The increase in G&A from 2018 to 2017 reflects the strong performance we experienced in 2018, largely driven by incentives. Our staffing levels have remained stable, and we've maintained a lean approach, which means this variable can fluctuate annually. I anticipate that there will be a baseline increase due to inflation. Adjusted for accounting impacts, the inflation-related increase from 2019 compared to 2018 should be considered.

Thanks for the additional disclosure. I'm going to give all credit to Bob because Juan just thought it was huge.

It's all Juan's doing.

I wanted to focus on SHOP a little bit this morning. The first thing is just the RevPAR trend, which was 1% this quarter, 1.8% last quarter, and about 3.1% a year ago. Could you talk a little bit about what's happening with pricing power? I was particularly struck by your comments regarding new leases, which indicate a negative mark-to-market that seems to contradict some of the data we've observed from NIC.

Yes, so, I love this topic, Tayo. I wouldn't focus on the NIC data, it really doesn't look at apples-to-apples, it's not actual rates and it's tough to divine certainly in our opinion. For our data, though, we can see quite clearly the trend and the RevPAR has two components as you know. It has the in-place increases were residents that have been here year-over-year. And that we continue to see very nice pricing power on it. I mentioned north of 5% for those rate letters that just went out, and so that continues to be very encouraging with very few financial move-outs, by the way. What's driving that risk that you point out, rightly in terms of RevPAR over the course of the year, is the releasing spread. That has been in the mid-to-high single digits down versus previous resident and that is a function, of course, of new competition. And so on a blended basis, we point to 2019 in the 1% range for RevPAR. It really reflects those two factors. But it's blend frankly.

Thanks Tayo.

Okay, thank you very much.

I mean, go ahead.

And then just one other point in regards to just that dividend outlook going into '19. Again when we kind of take a look at your guidance, make all the adjustments to kind of get to FAD, we kind of start getting to kind of like a mid-90%s type FAD dividend payout ratio. And just in light of that, wondering how you guys are thinking about the dividend?

Well, thank you for asking. The Board just increased the dividend in December and we feel very confident about our position relative to the dividend at the midpoint. It's in that low 80%s relative to normalized FFO. And as we said, we are committed to returning to growth and confident we can do so.

I think nobody said hi to Juan. So I'll say hi to Juan. I thought I'd say during the Q2 given that he was out of the way, but maybe next time.

Go ahead. We'll work at that, go ahead.

I'll just ask one question. So you've accelerated development on the life science side, and I was wondering, did you see any potential for synergies between the MOB and life science development platforms given all of those university relationships, most of those universities have some very good hospital systems affiliated with them? Do you see any synergies to accelerate your MOB development as well?

Yes, it's a great question. So this is Pete Bulgarelli. Thanks for the question, Daniel. It's really a strategic focus for us. I mean there is an incredible overlap between our Research & Innovation portfolio and the opportunities with the MOB and the medical portfolio. And kind of in-between there is the academic medical function as well. So if you think about it typically, many of these universities we're working with, they have life science research, they also have med schools, and they have academic medical facilities, and usually are leading research hospital. And so if we look at the opportunities, the cross-selling opportunities and the integration that we can do with those institutions, we see a lot of clear blue water.

Okay. That's all I have, given it's already 11, 11 o'clock. I'll hop off.

Thank you for being considerate. We appreciate it.

Bob, I wanted to touch on the $10 million rent adjustment you mentioned in your prepared remarks. Do you have the timing for those reductions and how many tenants that relates to?

Mike, it's Debbie. It's a handful of tenants and it would be throughout the year.

And did Ventas receive anything in return, I guess for doing those rent adjustments? And was there any discussion to move that to the management portfolio?

Right. As Bob mentioned, this hasn't happened yet, so we are making our best estimate regarding our expectations for 2019. We've created a model and forecasted it primarily as a Triple-Net roll-down estimate. However, there are several possibilities, including the potential transition of those assets to other operators and the management contract in relation to our asset sales. We anticipate it will be a combination of these factors. The simplest way to understand it is through how we reflected it in the numbers, which is in Triple-Net.

And then last question related to the 2019 guidance, does the range include any non-recurring items similar to the Ardent prepayment fee that was recorded in 2Q '18?

No. Thank you for asking. We do not have fees or payments from tenants as we did last year.

Hi. I'll just ask one. So, can you remind us what your plans are for the Ardent stake assuming that company does go public?

Well, we have about a $50 million investment in Ardent, and given the quiet period that Ardent's in, I would prefer to defer that discussion and tell another time.

Fair enough. All right, thank you.

Hi, good morning. Thanks for squeezing me in.

We're happy to do it.

Thank you. So CapEx spend was up in Q4. Just looking at the office segment, it was about 22% of NOI, but more like 12% for the full year. Just I wanted to see what accounted for that spike in Q4. And then maybe what you're budgeting for 2019?

We typically observe an increase in FAD during the fourth quarter, and this trend continued across our portfolio, including our Office segment. As we examine our guidance for 2019 regarding FAD CapEx, we anticipate increases, particularly in the Office segment due to lease-up activities, which is the primary factor behind this change.

And then percentage of NOI, what's the fair number for 2019?

For which?

For the full year?

For the full year or just for the Office segment?

Mid-teens 15% or so.

For the $10 million rent reduction that's in 2019, how different is that from the full annualized amount that will carry over into '20?

Again, it depends on when and how it's structured. There could be some potential carryover effect that would make it a little bit larger for '20, but immaterial basically.

Got it. Okay, that was it. Thank you.

All right. Well, thank you. I just want to thank everyone for their attention to Ventas and your interest in our Company. We appreciate it greatly. Our whole business continues to be driven by this great demographic demand and need-based diversified resilient long-term cash flows. And our team is really in great shape and we feel good about our relationships with our partners and care providers, our balance sheet, our opportunity for growth externally and our large and growing development pipeline of terrific Research & Innovation assets. So we're feeling good and we look forward to seeing all of you soon. Thank you.