芬塔 (VTR) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ventas Q4 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Ryan Shannon, investor relations. You may begin.

Thanks, Sierra. 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, 2016.

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 projections, predictions, and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. 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.

We refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2015, and the Company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the Company and its management. The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.

Please note that quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure, as well as the Company's supplemental disclosure schedule, are available in the investor relations section of our website at www.ventasreit.com.

I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the Company.

Thank you, Ryan. Good morning to all of our shareholders and other participants and welcome to the Ventas year-end 2016 earnings call.

I'm delighted to be joined this morning by my Ventas colleagues as we discuss our excellent productive year, highlight our continued execution of our business plan, and discuss our outlook for 2017.

Our results and our 2017 expectations are completely consistent with the preliminary view we shared with you about a month ago. The Ventas advantage of superior properties, platforms, and people has enabled us to consistently deliver growth in income and outstanding performance through multiple cycles for almost two decades. Our success has been founded on solid strategic vision, innovative and rigorous execution, and a stable team with the skill and the will to excel.

With our commitment to diversification and balance in our high-quality portfolio, our financial strength and flexibility, and the insight to allocate capital wisely in five asset types across the capital structure, we have enjoyed an enduring advantage in value creation. These principles powered our great year in 2016 as we reinforced our position as the premier provider of capital to leading healthcare and senior living companies and university-based research institutions. They will also serve us well as we look forward to 2017, despite a changing macro environment.

I'm happy to share some of our important accomplishments during the year. First, we delivered 16% total return to shareholders, outperforming the S&P 500 and the REIT and healthcare REIT indices. Our 17-year compound annual return to shareholders is an exceptional 25%.

During the year, we grew normalized FFO per share by 5%, at the high end of the guidance range we presented at the beginning of 2016, and we did so on an even stronger balance sheet than we expected, ending the year with a meaningfully enhanced credit profile. We worked with our leading operators to grow our same-store cash NOI through operational-excellence initiatives and focus.

We made or committed to investments of nearly $2 billion, including our exciting and accretive $1.5 billion acquisition of a high-quality new life sciences and innovation center portfolio affiliated with leading universities, academic medical centers, and research institutions. This deal is a winner, with great yields approaching 7%, attractive real estate, long-term leases with institutional-quality tenants, and a leading developer partner in Wexford. It also added an important new channel for growth, and we already have a robust pipeline with significant near-term acquisition and development opportunities.

We also delivered reliable income growth to our shareholders by increasing our dividend by 6%. Ventas has one of the best dividend growth records in the REIT industry and it remains an important component of the value proposition we offer to shareholders.

To fund our business, we once again demonstrated excellence in capital markets by completing over $2 billion in highly attractive, long-term senior note and equity offerings. We also generated additional funding sources by accelerating our capital recycling and portfolio optimization plan, receiving over $600 million in profitable loan repayments and disposition proceeds from non-strategic assets.

We cooperated with several of our customers to help them achieve their business objectives and increase their cash flow, while at the same time protecting Ventas and optimizing our portfolio. These mutually beneficial arrangements with Sunrise, Brookdale, Capital Senior, Kindred, and others demonstrate our commitment to our customers and our ability to find innovative solutions that benefit those companies. Key among these agreements is the $700 million SNF disposition deal we reached with Kindred to enable Kindred to exit its skilled nursing segment at a very favorable cash rent yield to Ventas of 7%.

Finally, we also delivered an innovative capital solution to our partners, Ardent and Sam Zell's EGI, to fund their pending acquisition of high-quality acute care provider LHP and scale the Ardent platform into a $3 billion revenue company operating in six states. With its major market share, valuable not-for-profit relationship, and strong margins and payer mix, LHP is a great fit for Ardent and we hope to close our investment at the end of the first quarter.

As a result of our 2016 activity and 2015 spinoff of most of our skilled nursing properties, Ventas has created an industry-leading differentiated portfolio, highly diversified by asset type, business model, and tenants. Specifically, our own portfolio generates 93% of its revenue from private pay sources. Our SHOP portfolio represents approximately 30% of our net operating income. Our attractive life science and medical office building segment generates about 25% of our NOI. Our operating and development partners are the best in their respective businesses. Our triple net leases, representing 42% of our NOI, have virtually no lease expiration through the end of 2018 and none of our tenants represents more than 10% of our NOI.

And finally, at the end of this year we expect to generate only 1% of our NOI from skilled nursing facilities.

During my 18 years at Ventas, we have seen a lot of changes in our markets as we've become the premier provider of capital to leading healthcare and senior housing operators and research institutions. We've navigated successfully through multiple economic, capital markets, and reimbursement cycles and have continued to grow with strength and integrity.

That said, we now face a period of significant macro volatility and uncertainty. Whether it's major tax reform and its impact on real estate, modifications to the healthcare system, interest rates, or the unknown contours and economic impacts of potential trade barriers or immigration trends, none of us knows exactly what's in store for our businesses.

What we do know is that Ventas will operate with intensity, experience, and skill at the dynamic intersection of healthcare and real estate, two of the largest and growing sectors of GDP. We will focus on managing the risk and capturing the opportunities that a changing environment presents to us, through development of the right strategies, prudent capital allocation, and excellent innovation and execution.

That's what the talented and cohesive Ventas team has done successfully for almost two decades. And it's the same thing we intend to do in 2017 to create value for investors and customers.

Let me share some of our specific priorities for the year ahead. Enhancing our balance sheet through lengthened debt maturities and increased liquidity to take advantage of opportunities and preserve value in the context of a more volatile and uncertain environment. Allocating and recycling capital prudently by investing principally in life science, high-quality acute-care hospitals, and customer-related growth, and by making smart divestitures, including our SNF sale, as a way to further differentiate our excellent portfolio mix. Investing in our future growth and higher-quality asset base through selective development and redevelopment, especially in our exciting new life sciences business and premier senior housing and MOB assets with leading developers and tenants like AA-rated Sutter Health care in San Francisco. Continuing to build on our advantaged platform, including Atria, Ardent, and Wexford. Capitalizing on increasing convergence we see between healthcare providers, managed-care companies, and senior living operators. Engaging in mutually supportive and beneficial transactions with our customers. Driving cash flow growth and performance in our high-quality assets to deliver reliable growth and income. And continuing to align, motivate, and challenge our team, which provides our winning competitive edge.

It is indisputable that senior living and healthcare real estate is a great place to be. Underpinning our confidence is the incredible market that will certainly provide long-term opportunities for assets to be owned in the most efficient hands, like ours. The senior population in the US will grow rapidly, and with it, demand for our real estate sites, where essential home, care, and comfort are provided to individuals and their families and groundbreaking research is conducted every day.

We also foresee that senior housing and healthcare providers will work with each other and with managed care companies to limit readmissions, control healthcare costs as our nation ages, and advance the nation's health and wellness.

We expect to be a full participant in these trends, supporting this operating convergence with our capital. So, while we may experience near-term challenges from peaking deliveries of senior living units in 2017, or potential changes to the Affordable Care Act, the opportunities in our $1 trillion fragmented market are unmistakable, inexorable, and gigantic. That is one reason we continue to see significant interest in all of our asset types, from private equity, pension, and sovereign wealth funds, at robust pricing.

In the midst of a highly dynamic environment, we are confident that we can continue to capitalize on these opportunities. We have the properties, platforms, and people to continue leading our sector. The entire Ventas team is excited and ready to deliver in 2017 and beyond.

Now, I'm happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. I'm pleased to report another strong year of cash flow performance from our high-quality portfolio of healthcare, senior housing, and life science research properties.

Our overall same-store cash NOI increased 2.7% for the full-year 2016, right in line with our 2.5% to 3% total company same-store guidance range. Our fourth-quarter same-store NOI growth of 2.9% results are right in line with our expectations.

Let me detail our 2016 performance and 2017 guidance for our portfolio at a segment level, starting with our triple net business, which accounts for 42% of our NOI. Our triple net portfolio grew same-store cash NOI by an excellent 3.7% for the full-year 2016 over 2015. In the fourth quarter, triple net same-store cash NOI increased by 4.5%, driven principally by strong in-place lease escalations and rent reallocated to more productive assets from the Kindred LTAC lease modification agreement in Q2.

Cash flow coverage in our overall stabilized triple net lease portfolio for the third quarter of 2016, the latest available information, was consistent with prior quarter at 1.7 times. Coverage in our triple net same-store senior housing portfolio remained at 1.3 times, incorporating escalator growth for the trailing 12 months that exceeded 3%. Coverage trends in senior housing were supported by low single-digit EBITDARM growth at the asset level for the trailing 12 months.

Cash flow coverage in our same-store postacute portfolio was 1.8 times. Our shareholders continue to benefit from our spinoff of the majority of our SNF assets in 2015, together with the anticipated sale of our Kindred SNF assets in 2017. We expect that the spinoff in Kindred disposals will together achieve a highly attractive blended cap rate approximating 7% and will reduce our exposure to the skilled nursing space to only 1% of Ventas' NOI.

Specialty hospital coverage declined by 10 basis points to 1.9 times, in line with our expectation as Kindred entered the new LTAC patient criteria in the third quarter. As a reminder, Kindred expects this transition will have the most impact on asset performance through the first half of 2017, after which the net mitigated impact of the criteria begins to ease.

During the year, we also pruned our Kindred LTAC portfolio and extended leases on the remaining LTACs for eight years while Kindred navigates through the new rules on patient criteria.

Finally, Ardent continues to drive strong performance and stand out as a leading hospital platform, delivering sustained positive momentum in top- and bottom-line key performance indicators. Rent coverage at the assets improved 10 basis points sequentially to a very strong 3.1 times in Q3. Third-quarter 2016 results for Ardent compare favorably to even the very best publicly traded hospital systems in the US. Meanwhile, adjusted admissions, revenue, and EBITDA continued to trend positively through the fourth quarter of 2016.

For 2017, we expect our triple net portfolio overall will grow in the range of 2.5% to 3.5%, driven by more normalized in-place lease escalations in the year. As we discussed in prior calls, 2016 benefited from outsized escalators with certain tenants, as well as nonrecurring profits and fees from various value-creating transactions. Consistent with prior practice, our outlook does not include the benefit of new fees in 2017. Taken together, these items result in more moderate, yet still attractive, triple net same-store cash NOI growth in 2017.

Moving on to our senior housing operating portfolio, the framework by which we established our SHOP guidance range one year ago held up very well throughout the year, both for the full year and the fourth quarter of 2016. Our same-store SHOP cash NOI increased by 2.3% for the full-year 2016 and grew over 1% in the fourth quarter, both right in line with our expectations.

In both the fourth quarter and full year 2016, REVPOR increased at approximately 4% overall, driven by our high barrier to entry coastal markets where we have attractive pricing power. We also saw strong pricing in independent living rents and the care component of assisted living revenues. Labor cost increases, driven by wage pressures, exceeded 5% in 2016. These increases were partially tempered by the benefit of $2 million in lower sunrise management fees in the second half of the year.

Our framework for predicting the impact of new competition on performance was accurate throughout 2016. Our premier coastal markets in the US, such as New York, Los Angeles, and Boston, provided the engine room of growth for our overall SHOP portfolio in the fourth quarter and for the full year. These high-quality infill communities represent 70% of our shop NOI, and for the fourth quarter and full year, these communities increased same-store NOI mid-single digits on strong rate and revenue growth. Canada also delivered very strong performance, increasing NOI by nearly 7% in the fourth quarter and 5% for the full year.

We observed elevated levels of newbuilding openings in our trade areas in the fourth quarter. Our NOI exposure in markets with a new supply surplus continues to represent 30% of our SHOP portfolio, or less than 10% of Ventas's overall NOI. Our same-store NOI performance in the fourth quarter in these communities decelerated to a mid-single digits decline via occupancy pressure as a result of the cumulative impact of new deliveries.

Net net, the 70% of our portfolio in high-barrier markets powered same-store NOI growth overall, both in the fourth quarter and for the full year.

Turning to 2017, we remain bullish on the value proposition of seniors housing and we expect the SHOP portfolio to grow same-store NOI in 2017 in the range of zero to 2%. We are encouraged by continued pricing power in our SHOP portfolio, which fueled our growth in 2016 and continues to present opportunity in 2017. In fact, both Atria and Sunrise implemented accelerated rent increases through the annual rate letters issued this January. These rate increases appear to be holding up well in the first quarter. Given over 70% of annual SHOP revenue is determined by these rate letters, they are extremely important to our full-year SHOP profit delivery.

A more severe flu season thus far in 2017 will pressure occupancy in the first quarter. A slower start to the year, together with new deliveries throughout 2017, will likely result in a widening of the occupancy gap in 2017. Nonetheless, the aforementioned strong rate increases support expected NOI growth overall for the year.

The accelerated level of pricing is also important in light of the continued labor wage pressure, which we estimate will approximate 4% to 5% for our SHOP portfolio overall in 2017. The carryover impact of Sunrise fee reductions from the revised contracts signed in Q3 2016 act as a partial offset to these wage pressures.

We expect deliveries of new supply in 2017 to outpace the elevated levels observed in 2016. In the 30% of our SHOP portfolio with the supply surplus, we anticipate mid to high single-digit NOI declines, a deceleration due to the cumulative impact of new units online. That said, new construction as a percentage of inventory within our trade areas has held steady at 5% overall over the last several quarters and we are seeing early signs that suggest new starts may be slowing.

Encouragingly, the 70% of our portfolio located in high-barrier markets are expected to continue driving mid single-digit NOI growth in 2017. In fact, we continue to invest in attractive, high-return redevelopment projects in these advantaged markets, with six new projects totaling $70 million now underway to help fuel our growth over the medium and long term.

Let's round out the portfolio review with our office operations reporting segment, which includes our medical office business, as well as our newly acquired life science and innovation centers. Taken together, these assets now represent approximately 25% of Ventas' annualized NOI.

The 23 operating assets acquired through our life science investment, which closed in September 2016, performed very well in the fourth quarter and are in line with underwriting. We expect two more properties to come online late in 2017, adjacent to Duke University and Wake Forest.

Finally, we have already made exciting progress in scaling the life science platform by green-lighting two new ground-up developments associated with the University of Pennsylvania and Washington University.

In our medical office business, cash NOI for the full-year 2016 same-store pool of 270 assets increased by 1.3%, in line with guidance. In the fourth quarter, same-store NOI increased 2.1%. Fourth-quarter results were driven by rate growth from in-place rent escalations and expense controls, modestly offset by lower year-over-year occupancy. On a sequential basis, as expected we made progress in the fourth quarter in growing occupancy, with sequential occupancy increasing by 40 basis points to 92%.

Looking ahead to 2017, we expect stable and steady growth of 1% to 2% from our same-store office portfolio of 364 medical office assets. This guidance assumes modest occupancy and revenue growth as we continue to fill the leasing pipeline through 2017.

Turning to our overall Company finance results for the full year 2016. In 2016, we delivered strong earnings and dividend growth, together with enhanced balance-sheet strength. These results were driven by increasing cash flows from our high-quality properties, optimization of our portfolio through continued capital recycling, and terrific capital markets execution.

Income from continuing operations per share for 2016 grew 36% to $1.59 compared to 2015. Full-year 2016 normalized FFO totaled $4.13 per fully diluted share, representing a 5% growth on a comparable basis over 2015. This strong year-over-year earnings growth was driven by accretive investments, lower transaction costs, positive property performance, and profits and fees from transactions with borrowers and tenants.

We closed on $1.6 billion in acquisitions in 2016, including our acquisition of 23 high-quality life science and innovation centers. We also invested over $140 million in high-return redevelopment and development projects in 2016.

We accelerated our portfolio optimization and capital recycling programs during 2016. Ventas sold properties and received final repayment on loans receivable for proceeds totaling nearly $620 million, at a gain of $100 million and with 8% cash in GAAP yields. These proceeds outpaced our previous guidance of $500 million, including approximately $350 million in proceeds realized late in the fourth quarter.

Importantly, we made great strides in enhancing our balance sheet and financial strength in 2016. We demonstrated capital markets excellence by issuing $1.3 billion in equity over the course of the year at an average gross price of approximately $70 per share. We also raised $850 million of new senior notes, including our most attractive 10-year bond in Ventas' history with an all-in rate below 3.25%.

Meanwhile, we retired or refinanced approximately $1 billion of in-place debt, yielding approximately 2.3% on a GAAP basis.

This cumulative capital activity during the year further bolstered our balance sheet at year-end. The Company's net debt to adjusted EBITDA improved to 5.7 times, a 0.4 times reduction from our year-end 2015 leverage of 6.1 times. Our fixed-charge coverage grew to an exceptional 4.8 times. Our net debt to gross asset value improved by four percentage points to 38% and our secured debt to total indebtedness reached 6%.

Let me close out our prepared remarks with our full-year 2017 guidance for the Company. In 2017, we expect to demonstrate continued enterprise strength through ongoing strategic dispositions by extending debt maturities and through continued investment in our attractive platforms. Our expectation as we begin the year is for 2017 income from continuing operations to range between $1.72 and $1.78 per fully diluted share. We expect normalized FFO per share to range from $4.12 to $4.18. We expect the total Ventas same-store portfolio to grow cash NOI by 1.5% to 2.5%, with all segments contributing to growth, as described earlier.

Our guidance range assumes continued capital allocation discipline. We expect our ongoing capital recycling program to generate $900 million in disposition proceeds at a 7% to 8% GAAP yield. This includes $700 million in proceeds at a gain approximating $670 million in the second half of the year through the potential sale of 36 skilled nursing facilities. Disposition proceeds are expected to be redeployed at approximately the same rate into new 2017 investments, approximating $1 billion, principally to scale our life science and acute care platforms, including $700 million in secured debt financing to fund Ardent's acquisition of LHP. The LHP deal is expected to close late in the first quarter of 2017.

We also expect to invest in future growth through attractive new ground-up life science developments, with our development and redevelopment funding expected to accelerate to approximately $300 million in 2017.

A note on quarterly phasing. We expect a softer first quarter sequentially in 2017, due to nearly $350 million in late Q4 2016 dispositions, the proceeds of which are principally being held as cash until they can be redeployed into our LHP acquisition in late Q1. We plan to drive an even stronger financial profile in liquidity in 2017, including refinancing approximately $1 billion of low-cost short-duration debt with longer-dated notes.

Our outlook assumes 358 million weighted average shares in 2017, compared to 348 million shares outstanding in 2016. The increase in share count arises from the full-year impact of shares issued in 2016 and we do not assume new equity issuance in 2017.

Net, we forecast our leverage at year-end 2017 to be in line with our strong year-end 2016 position. The result of this 2017 activity underscores the continued excellence of Ventas' enterprise and our team's confidence in our ability to continue to create value for our shareholders.

With that, I will ask the operator to please open the call for questions.

(Operator Instructions). Juan Sanabria, Bank of America.

For the RIDEA portfolio, how do you guys think about the trajectory of that same-store growth? Could there be any quarters throughout 2017 where the growth goes negative, but the full year is still positive? It just looks like you've got pretty tough comps with [canton] in the second half in particular and rolling the benefit of just lower Sunrise fees in the second half as well. How should we think about growth?

Thanks, Juan. For the full year, just to reinforce, we expect to grow. So the guidance was zero to 2% is the full-year outlook.

As we look at phasing, I expect that we'll grow throughout the year, and fairly consistently. There are puts and takes. We mentioned, for example, the flu season in Q1, highlighted that the occupancy challenge from that is going to affect Q1. However, for the first half we also have the carryover benefit of the management fee savings on Sunrise. So net net net, as we look across the quarters, we expect fairly consistent growth. No hockey stick type movements either way.

Okay. And then on the MOB platform, you guys had, I think, 1.2% same-store growth in 2016, kind of 1% to 2% in 2017, which is below the typical trend we see for most MOB platforms of 2% to 3%. If you could just delve into what is driving that kind of lower growth, and when should that start to accelerate?

So, 1.3% growth was -- 1.3% was the growth last year, and if you unpack that a little bit, we had an interesting year in the sense of a significant tenant departure early in the year and then having to refill that pipeline in terms of tenancy in the back half. That's what we saw in the fourth quarter. We saw the sequential improvement and 2% growth in the fourth quarter just in line with our expectation and reiterating the same steady type of growth in 2017.

I'd highlight we have fairly significant roles in 2017 relative to history, so that's our challenge to meet and beat in 2017 on the topline. So that's really how we think about it. It's going to be a topline-driven business, but very steady and predictable.

Okay, great, and just last question for me. For hospitals, how are you guys thinking about making incremental investments with the uncertainty that Debbie alluded to with the potential repeal of the Affordable Care Act? Are you changing how you are underwriting or are you kind of hitting the pause button or how are you looking at things on the hospital space at this point in time?

We are excited about our investment in Ardent, which, as Bob said, is performing very well. We are executing on the game plan, which is to scale that platform as we hope to fund the acquisition of LHP in 2017 and LHP is a real gem, so I think our strategy of acquiring really high-quality assets, scaling the business, and we are very focused on executing on that this year.

And in addition, we have said all along that we are going to be very highly selective, which we have been and will continue to be, but we have a gigantic secular opportunity and we will continue having conversations with people. And should there be additional opportunities that we think will create value, we will certainly pursue them. So that's where we stand on the business right now.

Okay, thank you very much, guys.

Smedes Rose, Citi.

I wanted to ask you on RIDEA. You mentioned, Bob, that Atria and Sunrise have rolled out accelerated rate increases, and I was just wondering when you say that, does that mean that they are increasing what they normally would have done or are they impacting more customers sooner for rate increases? What does that mean, exactly?

Sure. So as you know, Smedes, in January for most of the business, not all, but most of the business, the annual rent increase for in-place residence goes out. And the point I made this year is we had more aggressive, would be the right word, accelerated rate increases for this year versus last, and particularly so, I'd say, in the Sunrise portfolio, and Atria has historically had the same methodology. But I think we saw more alignment between the two operators this year, so strong growth and stronger than last year in terms of that rate letter, which I mentioned is really important to the full-year revenue number.

And I think one of the real benefits that Bob has brought to this -- to our senior housing business in working with our care providers is really understanding pricing and where we are making money and making sure we are pricing appropriately for the care and the home that seniors are receiving.

And so, really deconstructing what the pricing should be and matching it with the services that are being provided and the quality of the residence that's been provided, so clicking, double clicking, triple clicking into pricing and making sure that we're matching pricing with needs and services.

Okay. And then just on the supply, as you break out in your supplement, it continues to kind of tick up a little bit sequentially. Do you feel like 2017 is a peak year in terms of construction? You mentioned that you are seeing some slowdown in starts. Or do you -- kind of maybe a little more color around that.

Sure, so let me start with deliveries first. So we saw elevated deliveries really in the second half, beginning in the second half principally of last year. We expect that to continue and to increase in terms of new deliveries in 2017 versus 2016.

At the same time, when you think about new starts, we've seen through the NIC data that for two quarters now for our trade areas we've had 5% construction to inventory, so level amounts in both quarters. And as we look at the data, we said some early signs perhaps that that new starts may be slowing. So that gives us some hope about that, but the deliveries certainly in 2017 will be elevated, even versus 2016 levels.

Thank you.

Michael Carroll, RBC Capital Markets.

I know, Bob, in your prepared remarks you kind of talked about the LTAC portfolio and Kindred's plans to mitigate the new patient criteria. Can you explain how they plan on mitigating some of that weakness?

I'll take that, Michael. Good morning. So as we talked about before, Kindred's spent a year or two preparing to move into patient criteria, which Select Medical, another LTAC provider, went on successfully almost a year prior. So Kindred was highly prepared to make this transition.

And essentially, Kindred has been adopting a strategy of really identifying patients who are eligible for LTAC reimbursement, as well as developing a strategy where they can care profitably for what are called site-neutral patients. So, I have every confidence that Kindred will be able to go into criteria in accordance with its expectations and work through the reimbursement and mitigate some of those impacts as we look to the back half of 2017. So, that's a shorthand way to describe a very complex transition.

Okay, then real quick on the coverage. I guess it's at 1.9 right now. I mean, how much further should we expect that to drop as these mitigations kind of take hold?

Right. I mean, what we've talked about in the past is over time we would expect it to be maybe 20 basis points, 10 to 20 basis points, all else equal, but there will be a trough and then, of course, they will elevate out of that in the back half of 2017 and into 2018.

So, in and around that neighborhood and, again, very expected, I guess. We have confidence in Kindred's ability to execute and we have good long-term lease arrangements with them as we go through the transition.

Thank you.

Steve Sakwa, Evercore ISI.

I was just wondering if you could talk a little bit more about Wexford, and it sounds like you've got some robust development opportunities there. Can you just maybe talk a little bit about the deal, what's gone well, and maybe what have been some of the challenges, and maybe talk a little bit more about the returns and the opportunities on the development front?

Sure. First of all, we are very excited to be in this business with the university-based R&D tenants, and it's UPenn Medical, it's Yale, it's Duke, Wake Forest, really leading institutions who account for 10% of university-based R&D spending in the US.

And I think the opportunity -- and, also, Wexford is the name in this business, so being partnered with them, I think, is a real advantage. And the business opportunity is really very much like the MOB opportunity, for example, which is to say we have these big institutions. They have a lot of demands on their capital and they don't need to own or build all of their real estate.

So we have this great nucleus of assets now. We have a great development partner who is renowned among the universities for what they do, and the business plan is to scale that platform by doing more business with the universities who are already in our tenant base and to do business with additional leading R&D universities, very simple.

And what's exciting about this acquisition is that, A, the assets we acquired are excellent and they are performing well. And then, B, the demand for what we are doing is very strong. And so, we see additional follow-on opportunities in the pipeline with one very well-known university. We also, as Bob said, have green-lighted a couple other projects, one adjacent to UPenn in downtown Philadelphia, another one related to WashU. And the pipeline is very robust.

And so, we think this can be a great channel for growth for us. It's really come in sort of fast and furious, and our job is to make sure we are doing good underwriting and that we are available to build this as a real growth opportunity for the Company. So, we are excited about it.

Could you provide any parameters around sort of unlevered development yields in this business?

Of course, it always depends on the amount of pre-leasing, etc., that is -- and what the credit quality is, things like that. But, in general, we would be looking at 7% to 9% yields.

Okay, thanks very much.

Nick Yulico, UBS.

Just, I guess, first off on, Bob, going back to the senior housing operating guidance this year. I know you gave some detail on how to think about occupancy and labor expenses. Is it possible to get a little bit more of a breakout for the same-store revenue growth versus the same-store expense growth?

For 2017 specifically, in terms of the outlook?

Yes.

Sure. Let me unpack that a little bit. In terms of occupancy, we finished the fourth quarter about 120 basis points down year on year. Our expectation as we come into the first quarter, as I mentioned, is with the flu and with these new deliveries that that gap would widen. I would put that -- that's versus prior year. I would put that in the 200 basis points down range.

At the same time, really importantly, the pricing that we expect to see -- and if we delivered REVPOR of 4%, I think given that we were more accelerated in our rate letters this year, we expect to see something north of that in terms of rate. And that's necessary, again, because of the wage pressure in the 4% to 5%. That's for labor, I should say, that 4% to 5%. Total cost will be below that growth rate as we drive efficiency in utilities and things like that. So that's the algorithm, net net net, to get us down to the zero to 2% outlook.

Okay, that's helpful. And then going back to Ardent, could we get a feel for the ultimate ACA benefit that they've gotten? I mean, if we look at the public hospital operators, it's been between around 5% to as high as 15% as an EBITDA benefit for operators in 2016. Do you have a sense for where Ardent would fall in that range?

I do. And if you look at Ardent pro forma with LHP, they will be in six states, as I mentioned. Only two of those are Medicaid expansion states.

You know, our general view is that the potential impact on the Company as a whole would, potentially, assuming no mitigation, be less than the potential synergies from the transaction. And so, we have a built-in buffer there, as well as obviously as the landlord we have over three times coverage. But just at the operating level, we think that what we are doing is really smart and we have a built-in cushion there, should there be any impact from a change to the Affordable Care Act.

You know, I do think it's interesting and I caution investors not to equate equity operator prices with the reliability of lease streams, but I would note that if you look at, like, an HCA, for example, their stock price is $66. Last year at this time, it was $84 -- $83, $84 now. I mean, I think there is recognition that these good companies will continue to be good, and what these excellent operators do over the decades is they know how to pull the levers in this business to create positive cash flow, and that's what we would expect Ardent to do with a very seasoned CEO that's been through this for three decades. So we feel good about it.

That's helpful, Debbie. Just one last question is it sounds like there is some acquisition opportunities heating up a bit in hospitals, but more so on the nonprofit side. Is there any opportunity for you and Ardent to participate in that?

Yes. Well, good. We are really focused on closing LHP and are excited about that because it's a gem. And what comes with it, as you point out, are these really valuable not-for-profit relationships with academic medical centers and other large not for profits, like Ascension. And so, that is one incremental step toward this gigantic opportunity, and again we'll continue to have conversations, but our focus right now is really closing LHP and then we'll take it from there.

All right. Thanks, everyone.

Vincent Chao, Deutsche Bank.

Maybe just to stick with the last line of questioning. Debbie, maybe if you could expand a little bit. You mentioned some cushion at the operating level beyond just the coverage. Exactly what are you referring to there? What are some of the things that can help offset some of the potential ACA pressures?

Well, should there be ACA pressures, which, honestly, I think there may be a lot of easier policy priorities to accomplish in the near term, but should there be something, I think they will be, first of all, pushed out, and, secondly, we have -- we announced that there would be significant synergies in the merger between the two companies, which, again, only has two of the six states in Medicaid expansion. And so, we think that's more than enough cushion should there be impact from an ACA repeal.

But the key thing is what is the replacement. The replacement may be fine and so it may have no impact. The key thing is what is the replacement, and, of course, we would expect that that replacement would not take effect for one to multiple years.

Okay. Just trying to clarify that point. And then, just on the hospital opportunity, which you are very happy with the Ardent performance and still looking to scale that business. I guess from a pipeline perspective, given some of the uncertainties out there, has the pool of potential acquisitions changed at all on the hospital side? Or are you still seeing the same level of potential?

Well, as we've said, we are going to be very selective and we're going to play at that top percent of operators that have -- and assets that have significant market share, that have quality outcomes, that are efficient, etc., and so those conversations will continue over time, and it's a really gigantic opportunity. It's a $1 trillion revenue business, the acute care business.

But, I guess, have the conversations changed at all in light of some of what's going on out there with regard to policy?

Really, I talked to Todd, who is here with me, and we were at the JPMorgan healthcare conference, and, honestly, the hospital acute care providers are going about their business, which is creating efficiencies, driving quality, all the things that they were doing before. And many of the changes that are in the healthcare system are so already embedded in what they are doing I would say that that is really what they are focused on, execution of their business.

Okay, thanks.

Michael Knott, Green Street Advisors.

A question for you just along the lines of ACA potential repeal. Can you just touch on how you think that might impact your MOB business and maybe health system decision-making with regards to space?

Right, so I would say that, again, let me just repeat a little bit of what I said, which is that the acute care providers are going about the business of driving efficiencies, quality, improvements, M&A, etc., and they are some of the biggest customers, obviously, in the MOB business and we have a really high-quality portfolio that's affiliated with some of the top hospitals.

And so, while uncertainty generally is -- can delay decision making and things like that, and we may see some of that this year, I do think that we are well positioned to continue creating stable, growing cash flows in our portfolio.

Okay, thanks. And then just on the investment side, do you mind just touching on what you are sort of seeing out there, the pulse of the investment market, any changes in cap rates or appetite? Is there a slowdown because of some of the uncertainties?

And then, I think Bob used the word discipline with respect to your investment activity. Just curious if we could also sort of infer that caution is a word that you are applying to your investment activity opportunity set, just given where we are at in the cycle.

So, I think what's really interesting is that we are seeing huge continued interest at very robust pricing, as I mentioned, across our asset types.

And it's coming from pension funds, it's coming from sovereigns, it's coming from private equity, and I think those people -- that is a sign that people value our assets and they see the big opportunity in our business. When we talk about being disciplined capital allocators, as you know, we have always been about doing things that create value for our investors and hopefully being good partners with our customers at the same time. And so, I would not conflate those two words.

I think we are disciplined when we think about our cost of capital, when we think about risk-adjusted returns, and when we think about what is going to create value. And that's always been a hallmark of Ventas' and that's partly why we have such a good track record of total return. That's why we have a good track record of capital allocation and growth in income is we take that very seriously and we think about deals on their own and also how they affect the balance and mix in our portfolio.

So, we will be disciplined; we've always been disciplined and take all those factors into account as we continue to make investments.

Okay, thanks. And then just one more from me, if I could, and thanks for the time, on senior housing. I know you've emphasized, Bob, the strength of the rate letters that are going out, and there's this kind of dichotomy between reduced occupancy, but strong pricing power. Can you just talk about how long you think that can persist, and if we look into maybe a year from now, as we think about 2018 just with all the continued supply growth, deliveries in 2017, and then probably similarly high in 2018, I would argue, can you just talk about the outlook for pricing power? How long can that dichotomy between occupancy and rate growth sort of persist? Thanks.

Good question, Michael. I keep coming back to the value prop of senior housing, and let's not forget the big picture of the cost of replicating the services that you receive in the senior housing community. It's twice as expensive to do so at home, not to mention the benefits of being in a community.

And that, I think, is a truism, every market that we go into and everything we hear, and the value added of the services in your report highlights this of assisted living services, the value it provides to residents, and I don't think that, generally speaking as an industry, we've priced that value necessarily to the point that we can.

And so, we are seeing in 2017 the opportunity to do that. Because of the value proposition, I see the opportunity to continue to do so. I come back to the framework, though, of looking at the high-barrier markets where you have the demand, where you have the wealth, where you have little supply of new competition. That's the area where we have pricing power and that's where we are focused. And I think that can continue. But clearly, the supply is going to have an impact in the balance of the portfolio.

Just a quick follow-up. So, in general, you think sort of a stronger renewal rent prospect and then maybe weaker on the new rent side can continue for a while, just given what you talked about, the value that's provided to residents, etc.? That seems like that can persist?

Yes. So we have not only the annual increase, but also street rate. We expect to see year-over-year growth again and that's driven by those engine room markets where we see nice increases, not at the level necessarily of the rate letter, but still nice growth. So it's both that we see, particularly in that 70% of our portfolio that is the high barrier to entry markets.

Okay, thank you.

Okay, thank you.

Richard Anderson, Mizuho Securities.

Thanks, and I know one hour is the magic number, so I'll be quick. So in your disclosure, you've had this footnote before for SHOP. It says it excludes closed units during periods of closure, which is kind of a funny way to say it, but I assume it's been a lot of thought put into it. But what does that mean, like, and how substantial is that relative to the impact it might have on your growth profile in the SHOP portfolio?

It's very minimal. For example, if there was a fire and the building was closed down or a flood or something like that, that type of thing. Very minimal.

Okay, the short answer is good with me. And then for 2017, you said -- you pointed out Canada was a leader at 7% plus or whatever it was for 2016. What do you think this Canada/US breakdown might be for SHOP in 2017?

Yes, I was, first of all, thrilled about the Canada performance. It grew mid-single for the year. That's great, 7% in the fourth. And if you look at occupancy, pushing 95%. And so I'm going to sound like a broken record here, but the opportunity as we think about 2017 is very much, with a 95% occupied building, to get some pricing.

Plus they have good hockey.

Plus they have great hockey. She is going to drive Canada next year -- or this year, 2017.

So Canada will again be a leader, you think?

Yes.

To the degree it was this time? I mean, that was pretty substantial.

It will be a nice grower, no doubt. It will contribute nicely.

Could that mean that US could be a negative number?

Well, again, we have a range. So 0 to 2%, you could probably back in the math to suggest that to be true.

Multiple permutations.

Because it's just where you are in the range.

Okay, sounds good. Thanks very much.

Chad Vanacore, Stifel.

Thinking about fourth-quarter earnings, FFO was largely in line. FAD was a little bit lower than expected and it looked like that was on CapEx spending. And I know you had warned us about this last quarter, but it still seemed to come in a little bit higher at around $45 million a quarter. So, should we expect that to be a run rate through 2017? Or does that moderate or increase?

Yes, so FAD, relative to what we put out a month ago in the range in terms of dollars, I think we are about $1 million below the $1.27 billion of our outlook, so, and that was really CapEx timing as much as anything. I would step back and say in terms of FAD CapEx focus areas, MOB is one area of focus in particular. But I wouldn't infer anything kind of beyond that.

What should we be thinking like on average per quarter?

If you look at the reconciliation for 2017.

Yes, and if we have about $125 million of what I call FAD CapEx in the year, it tends to be more back-half weighted, you know, typically in the fourth quarter to ramp a little bit in the fourth quarter. But, again, it depends a little bit, Chad, just on what is going on in terms of the projects. You could have a roof, which would be lumpy, for example. So, there is an extreme seasonality to that number.

Okay, thanks, and then just thinking about pricing growth, you mentioned pushing aggressive pricing on the SHOP portfolio. What's the difference in pricing between that 70% of SHOP that seems to be in high barrier to entry markets and the 30% that's basic competition?

In terms of absolute REVPOR?

Yes. Again, I think the pricing is really an enhanced way to appropriately have the operators be paid for the care and services that they are providing and to match pricing with the value that the families and the seniors are getting, and we are doing that more effectively, I would say, in 2017. And Bob will take the rest of that.

Yes. There is not -- if you look at the 70% versus the 30% at REVPOR, the 70% equilibrium markets, there's not a significant difference on REVPOR. What's different is the growth rate between the two.

Okay?

Yes, I'm sorry. So what you're saying is pricing in a more competitive market is a little -- that growth is going to be smaller than the high barrier market, is that about right?

Well said.

Exactly.

Yes.

Okay, all right. And just one quick update, the Kindred portfolio sales, I think you left most of that in Kindred's hands. Can you give us an update of where you are in that process?

I can and would encourage you to listen to Kindred's call later because they will give a more fulsome update because they are on point there. Our understanding is that it's going well and there's a lot of interest, as I talked about earlier, that there is a lot of interest in all of our asset classes, and this would presumably be no exception. And so, we are anticipating on balance a second-half execution of that transaction.

All right, thanks for taking my questions.

John Kim, BMO Capital Markets.

Last year in your supplemental, you broke down a sizable revenue-enhancing CapEx figure of $110 million and this year that figure is not in your supplemental. Do you still have this program or is it just now reclassified somewhere else?

We absolutely still have the program, John. We changed a little bit the presentation to really highlight on that one page, I will call it, the FAD CapEx breakdown, sustaining CapEx versus the prior pages, which demonstrate the development and redevelopment, so really just try to differentiate and distinguish the different types of spend. But the program is very important and a huge priority for us, as we've said. In fact, we're going to increase --

Accelerate it, yes, yes.

-- our amount of spending from $140 million to $300 million, round numbers, 2016 to 2017. So it's key -- it's a core priority.

And so, can you just remind us or maybe provide some color on what constitutes a redevelopment? And also, if you have a projected yield on your existing program?

If we have a what? I'm sorry.

A projected yield.

Okay, so in those numbers, we're talking about the selective redevelopment and development program we talked about. We would include within that ground-up development, like our Class A downtown San Francisco medical office building. It would be our newly-opened senior living community, Foster City, in northern California. It would include any life sciences, as we mentioned, potential developments with UPenn or WashU that we talked about, and it would include some redevelopments that we've done over time where there is significant impact on the community while we, for example, add a life guidance or memory care unit or, you know, build another wing or convert parts of the building to other uses, those types of things.

And, you know, we tend to -- as John said, we tend to look at 7%-plus returns, depending again on the profile of the tenancy, the pre-leasing, the credit quality in the ground-up developments. I mentioned in the San Francisco MOB we've got AA-rated credit. It's a substantially pre-leased building. That's one type of yield. As we are doing these redevelopment projects, I'd say high single digits, low double digits unlevered expectations for returns.

Okay. That's helpful. So the redevelopments are mostly additive, not just enhancing existing units.

I mean, principally they are redos of things or additions of things, yes.

Got it, okay.

That generate a return.

That generate a return, yes. Yes.

As distinguished from the FAD CapEx, which are profit-sustaining type initiatives, roofs and boilers and things like that.

Yes.

And Debbie, you mentioned briefly the share prices of some of the public operators. I'm just wondering if you find it preferable for your operating partners to be public or private.

We are agnostic. We want our operators to be great at what they do, leaders in their markets, provide good quality care, and operate with a lot of integrity and compliance. So that's what we like. And we have -- the lion's share of our portfolio, as we've reshaped our business over the last couple of years, is with those leading operators.

So we have a few more questions. I'm sorry, but we have to hustle. We have a few more questions that we still want to take, John. We'll be happy to talk -- okay, thank you.

Sure, no problem.

Jordan Sadler, KeyBanc Capital.

In terms of your acquisition discussion and guidance, in terms of deploying $1 billion or so in 2017, you are focused on life science and the acute care hospital platforms. So should we expect the life science deployments principally to be through development, and then -- is that right?

Yes.

So no new, really, stabilized property acquisitions there, outside of Wexford.

There could be. There could -- again, when we give the $1 billion, it's pretty straightforward. We got $700 million that we are funding on the Ardent acquisition of LHP, and then we have $300 million of other. Some are acquisitions of stabilized assets. Some are developments of life science that we've talked about.

I guess my question is, as you are looking out and pursuing and underwriting transactions, I'm just curious what your interest level is, where the best risk-adjusted opportunity is among the segments that you are invested in.

Yes. I think the best risk-adjusted segments are the areas we've identified for capital allocation, which will be really high-quality hospitals; definitely growth in the life sciences segment, principally by development, but also by potential acquisitions and follow-on opportunities; and customer-oriented activities. That's where we have been focusing the last couple of years and that's where we'll continue to focus and that's where we think we have the best return, in addition to, of course, the development and redevelopment that we just talked about.

Okay. And so on the other side, the trimming that you are doing, which was also identified, but there's a couple hundred million that's not, necessarily, your trimming could be done presumably out of the MOB and senior housing portfolios, as you've done?

I think that the trimming -- so we are talking, I think it's important to identify this capital recycling that we are doing in 2017 of $900 million of dispositions and then $1 billion of investments, so the $900 million is straightforward, too. It's the Kindred $700 million and then some drips and drabs, $88 million we just closed on some senior housing with a customer that was a good, mutually beneficial deal. So that covers about $800 million of it, and the rest is kind of drips and drabs to get to the $900 million, and I've already gone over the $1 billion. So that's the capital recycling that we've talked about that really is value creating.

Okay, thank you.

Josh Raskin, Barclays.

Thanks for fitting me in at the end. I guess I'll just ask a quick one. Just getting back to the slowing of new construction, I wonder, is there specific data on maybe markets or how long that takes to get to deliveries, etc., just when you would expect that to start showing up in terms of results?

I'd say one thing to point to is the data we referenced that could suggest some slowing is NIC data, where if you look both for IL and AL at starts, both -- in both cases they are the slowest that we've seen since 2012 to 2014, in that range. So, it's a couple data points. Anecdotally around financing would be another one, difficulty of financing, difficulty of lining up construction at a reasonable cost, etc. etc. So, those are some of the facts that would indicate it may be slowing, but it's still early to call that.

Yes, I didn't know if you were seeing anything in your specific markets anecdotally, more than the broad NIC data of just saying, okay, here are the markets. And then, you know, I didn't know if the $88 billion of divestitures, maybe that was related to what you are seeing in certain markets, etc.

The divestitures were really with one of our customers. They were underperforming assets, so we were able to sell those at a fixed yield and increase their cash flow and improve our portfolio so everybody was happy. So that was something that was a unique sort of solution that worked for both companies.

Okay, thanks.

Todd Stender, Wells Fargo.

Is Todd Lillibridge there? I had a MOB question for him.

He is.

All right. Same-store NOI growth in MOBs picked up a little bit in Q4, got you over 2%, but your outlook for this year would only top out at 2%. I just want to see if you can go through some of the drivers behind your growth expectations. That's part one. And part two is maybe just touch on the stuff you sold into Q4.

Good morning, Todd. I know, as Bob mentioned, you know, we were within our guidance this past year at 1.3%, at the midpoint, roughly, and as we have set 2017 guidance again really at that 1.2% to 1.3% range, and you are correct. We did finish the Q4 on a year-over-year basis at 2%. Our leasing and therefore occupancy was up in Q4, when we got to 92%. So we see a steady year.

But, again, as Bob mentioned, we do have a bit of a peak in terms of overall renewal activities that we are going to be faced with here in 2017. So we factor that all in and, again, we feel very comfortable with our guidance for 2017 between 1% and 2%.

Great, thanks, and then how about what you sold in Q4? Any characteristics we can point to, whether single tenant or smaller buildings?

Yes, nonstrategic assets that we thought we got a really good price for and that were more valuable to the tenant user than they were to us. So, a good transaction there.

Great, thank you.

Tayo Okusanya, Jefferies.

Tayo, you are batting cleanup.

It's just a quick one. Just given some of this recent news around Brookdale, I just wanted to -- could you just talk a little bit again about if Brookdale does kind of end up in play, what rights you have as a landlord for the company?

Good, okay. So Brookdale, as you know, is an important customer of Ventas and they are an important industry participant with 80,000 employees and 100,000 seniors that they care for every day. We have a good relationship with them. We have excellent agreements between the companies and we continue to try to work with Brookdale, as we do with all of our customers, to continue to enhance and improve our mutual businesses.

But I guess, specifically, do you have to approve a transaction? Or how exactly will that work if the entire company is being sold?

Tayo, how long have you known us?

(laughter). I'm just trying to get an answer there.

All kidding aside, we care deeply about the success of Brookdale and we will continue to try to work with them, as we have with our small disposition deal that we have in the market and as we have with our other customers, to try to continue making them a success.

All right, I had to give it a try.

Thank you. With that, I think we're going to close the call. We are going to thank everyone for their patience and we really appreciate your tuning in to hear us talk about our great year and what we hope to accomplish in 2017 on your behalf. So we look forward to seeing you, and thank you again for your interest and attention.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.