芬塔 (VTR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ventas First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ryan Shannon, Investor Relations. Mr. Shannon, you may begin.

Thanks, Tachia. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2017. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current beliefs as well as 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, 2016, 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 statement to reflect any changes and 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, and good morning to all of our shareholders and other participants, and welcome to the Ventas First Quarter 2017 Earnings Call. I'm delighted to be joined this morning by my Ventas colleagues as we review our positive results, discuss our fast start to the year, executing on our strategic priorities and confirm our outlook for 2017.

The Ventas Advantage of superior properties, platforms and people has enabled us to deliver consistent growth and income and outstanding performance during multiple cycles for almost 2 decades. The first quarter continued our pattern of resiliency and performance as we delivered $1.03 per share in normalized FFO, driven principally by excellent property NOI growth from our high-quality, diverse portfolio. Our year is also off to a great start in other key areas. As the premier capital provider to leading senior living and health care companies and university-based research institutions, we have been exceedingly active and productive during the 2 months since we last spoke with you. It has always been a hallmark of Ventas that we do what we say.

So I'd like to highlight a few of our significant year-to-date achievements that show how much we've accomplished towards the strategic priorities we established for the year. We've enhanced our balance sheet by increasing our liquidity through revolver capacity growth to $3 billion and an $800 million bond deal, we've lengthened our debt maturities and substantially increased our liquidity. Liquidity will enable us to take advantage of opportunities and preserve value for stakeholders.

We've already accomplished our investment guidance of completing over $1 billion of investments in high-quality assets that provides superior risk-adjusted returns and build out our leading platforms. And our $700 million skilled nursing, or SNF sale, remains on track. Completion of the SNF disposition will further differentiate our excellent portfolio mix, provide proceeds to repay debt and generate a material profit.

As you can see, we are allocating and recycling capital prudently as we use the proceeds of our late 2016 and early 2017 dispositions, also completed added significant gain to invest in new, high-quality, medical, life science and innovation projects, such as the South Street Landing project associated with Brown University. South Street Landing is 100% preleased, contains state-of-the-art medical teaching labs and simulation facilities, and we expect it to be fully open later this year.

We also continue to expand our investment into our future growth and a higher-quality asset base through selective development and redevelopment. For example, we've committed to or begun significant expansions of our university-based life science pipeline, with projects affiliated with University of Pennsylvania and Washington University, and we expect to fund an Atria ground-up senior housing development in the greater Philadelphia MSA.

Those investments also represent significant progress toward our goal of building out our best-in-class platform. Already we've expanded the Wexford business by 25% since we acquired it last year. We are also building out the Ardent platform by funding Ardent's acquisition of LHP, transforming Ardent into a leading care provider, generating $3 billion in annual revenues and operating in 6 states. Ardent continues to perform very well.

The acquired assets and enterprise have significant market share, strong margins, excellent payer mix, material synergy opportunities and outstanding relationships with not-for-profit and academic medical centers. The deal is an excellent fit for Ardent's business, and early integration efforts are going well. We've also expanded our relationship with an existing Senior Living customer, investing almost $200 million into triple-net leased senior housing assets, and we've engaged in mutually beneficial sale of asset transactions with other customers.

As we continue to focus on driving cash flow and enterprise efficiency and effectiveness, we grew cash flow from operations this quarter by 21% and same property NOI by 3.9%. So we have put some great numbers up on the board already this year. Our terrific team at Ventas is energized by the momentum we have to accomplish even more as we look to the balance of the year. As a result of the continuous progress we've made, Ventas has created an industry-leading differentiated portfolio, highly diversified by asset type, business model and tenant.

Among other things, our owned portfolio generates 93% of its revenue from private pay sources. Our SHOP portfolio represents approximately 29% of our net operating income. Our attractive life science and medical office building segment generates about 25% of our NOI. Our triple-net leases, representing 41% of our NOI, have virtually no lease expirations through the end of 2018. None of our tenants represents more than 10% of our NOI, and we expect to generate only 1% of our NOI from skilled nursing assets by year-end.

As we look at the macro environment, we continue to see volatility and uncertainty in the markets, in public policy and in the geopolitical sphere. The U.S. and other Western democracies continue to grow, albeit slowly, as today's GDP print shows, although employment and inflation indicators have continued to trend positively. While the new administration is attempting to jump-start the U.S. growth trajectory with its policies, it is unclear yet whether its proposals on taxes, regulation, trade or health care will do so or whether there is sufficient support in Congress to pass the administration's agenda.

In this environment, we continue to believe it's most important for Ventas to remain financially strong and liquid, maintain diversification and balance in our portfolio, drive cash flow and efficiency in our enterprise, allocate capital wisely, continue to elevate the already outstanding quality of our portfolio, make selective investments in our future growth and keep our team together and focused on creating value for customers and shareholders.

Before I turn the call over to Bob, there's one final point I'd like to highlight. Our diverse high-quality portfolio has never been more valuable than it is today as equity capital flows and inquiries continue to accelerate across all of our asset classes. These capital sources range from public firms, private equity, sovereign wealth funds, pension funds and other domestic and international players.

This surfeit of equity capital is attracted by the resilience, demographics, demand profile and risk-adjusted returns in our business. So we remain excited and optimistic that the Ventas business is situated at this dynamic and increasingly valuable intersection of health care and real estate. I'm confident that we have the right portfolio mix, strategies and tenured team to capitalize on our premier position and enjoy an enduring advantage and value creation.

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

Thank you, Debbie. I'm pleased to report another strong quarter of cash flow performance from our high-quality portfolio of health care, senior housing and life science and innovation properties. Our overall portfolio had an excellent start to the year, with same-store cash NOI growth of 3.9% in the first quarter. Let me detail our first quarter segment performance before moving to overall financial results and our reaffirmed 2017 guidance.

Starting with our triple-net business, which accounts for 41% of our NOI. Our triple-net portfolio grew same-store cash NOI by an outstanding 4.7% for the first quarter of 2017, driven principally by strong in-place lease escalations and rent reallocated to more productive assets from the Kindred lease modification agreement in Q2 of 2016. I would highlight that the benefit of the rent reallocation cycles out at the beginning of the second quarter of this year.

Cash flow coverage in our overall stabilized triple-net leased portfolio for the fourth quarter of 2016, the latest available information, was consistent with the prior quarter at 1.7x. Rent coverage in our triple-net same-store senior housing portfolio remained at 1.3x, incorporating escalator growth for the trailing 12 months that exceeded 3%. While coverage remained stable, operator cash flows have recently been compressed by occupancy declines and labor expense growth. Nonetheless, our senior housing coverage benefits from operator, market and acuity level diversification as well as strong lease protections for Ventas.

It is also important to note that the triple-net senior housing portfolio overall has lower levels of construction as a percentage of inventory in the NIC industry averages. Within our post-acute portfolio, SNF cash flow coverage held at 1.7x despite continued operating pressure in the SNF segment. After completion of the expected Kindred SNF sale in the second half of 2017, SNFs will only represent 1% of Ventas' NOI, and will enjoy very strong rent coverage.

IRF and LTAC coverage in the fourth quarter declined by 10 basis points to 1.8x. This change was in line with our expectations as rent escalated and Kindred completed its first full quarter under the new LTAC patient criteria. We are encouraged by Kindred's Q4 same-store volume and revenue growth amidst the revised criteria. As a reminder, Kindred expects the impact of this transition will peak in the first half of 2017 after which the net mitigated impact of criteria should begin to ease.

Finally, Ardent continue to drive outstanding performance through the first quarter of 2017 and stands out as a leading hospital platform, delivering sustained, positive momentum in same-store adjusted admissions, revenue and EBITDA. Rent coverage at the assets were strong at 3x in Q4. Fourth quarter 2016 results for Ardent's compared favorably even the very best publicly traded hospital systems in the U.S., and early stages of the LHP integration are on track.

With regard to Medicare reimbursement, CMS issued proposed rules for fiscal year 2018 for inpatient hospitals, LTACs, IRFs and SNFs. The inpatient hospital proposal included a net 2.9% payment increase, which was ahead of expectations, while the LTAC proposed rule was in line with expectations. The IRF and SNF proposed rules included a 1% payment increase. These proposals are subject to a common period before final rules are issued later this year.

For 2017, we continue to expect our triple-net same-store cash NOI overall will grow in the range of 2.5% to 3.5%, driven by in-place lease escalations. Moving on to our senior housing operating portfolio. We had a positive start to the year in our SHOP business. Same-store cash NOI in the quarter grew 2.9%, in line with our expectations. Unpacking the first quarter results further, same-store revenue increased nearly 2%, driven by solid rate growth, partially offset by lower occupancy.

As expected, first quarter occupancy was pressured by typical seasonal patterns, together with cumulative new units coming online in a more significant flu season. A further note on the flu. This season was more severe and occurred later in the quarter than in 2016. The flu impacts both move-outs and move-ins as communities are closed to tours and new sales as a result of flu quarantine. Encouragingly, REVPOR increased by more than 4% overall when adjusted for 1 last day in the first quarter versus the 2016 leap year. This rate growth was driven by accelerated in-place base rent increases in our high-barriered entry coastal markets as well as through increased pricing of care.

Operating expenses in the quarter rose approximately 2%, in line with revenue. Ongoing wage pressure in the 4% range was mitigated by effectively flexing labor versus occupancy while controlling nonlabor related costs, a benefit of our senior housing scale with leading operators and efficient operating platforms. The results also benefited from reduced Sunrise management fees and performance incentives in the quarter.

Turning to market-level performance. We were pleased to see the momentum continue in our high-barrier markets, including New York, Los Angeles and San Francisco. These communities grew Q1 same-store NOI by mid-single digits on very strong rate growth, exceeding 5%. Canada also posted very strong performance, increasing NOI by nearly 7% in the first quarter. Elevated levels of new building openings in markets, including Atlanta, Denver and Chicago, continued in the first quarter. Our NOI exposure in markets for the new supply of surplus continues to represent 30% of our SHOP portfolio or less than 10% of Ventas' overall NOI.

Our same-store NOI performance in these communities declined by mid-single-digits as a result of the cumulative impact of new deliveries. Nonetheless, our portfolio in high-barrier markets powered same-store NOI store growth overall. New construction as a percentage of inventory within our trade areas, when prior periods are revised for the NIC data, improved by 10 basis points to 5.5%. At the same time, as is typical in the NIC data, delivery scheduled for Q1 were pushed to future quarters.

We continue to actively manage our SHOP asset portfolio. Transitioning assets to new operators and business models and renegotiating management agreements are but a few of the clubs in our bag we have recently used to maximize value. In terms of our full year outlook. We continue to have confidence in our SHOP portfolio same-store NOI guidance range of 0% to 2%. The implied modest NOI growth at the guidance midpoint for the balance of the year is driven by the wider occupancy gap entering the second quarter and anticipated new supply coming online through the balance of 2017.

Despite near-term challenges, we remain encouraged by the resiliency of our high-quality senior housing operating portfolio, operated by the nation's leading care providers. The strength in our core markets reflects the continued long-term opportunity in senior housing. Let's round out the portfolio review with our office reporting segment, which is comprised of our university-based life science and innovation portfolio and our high-quality medical office business. Together, the office portfolio accounts for approximately 1/4 of our NOI.

Our life science operating portfolio continued to perform well through the first quarter, and is in line with underwriting. Sequentially, occupancy increased by 250 basis points to an outstanding 97%, driven by our attractive Wake Forest School of Medicine property that is 100% leased to Wake Forest University. Progress in capitalizing on the growth opportunity in this business has already exceeded our high expectations, with more than $350 million in follow-on investments since acquisition in 2016. We now have 4 development projects underway, totaling over 900,000 square feet, and a rich pipeline of opportunity is still ahead.

In our medical office business, same-store cash NOI in the first quarter increased by 3.7%. First quarter results were driven by in-place lease escalations and the benefit of lease termination fees. Adjusted for these fees, the MOB business grew same-store cash NOI by 1.5%, in line with expectations. The first quarter exhibit strong tenant retention, exceeding 80%. As we noted in February, our lease rollover this year are higher-than-normal levels, and the team is actively working to maintain occupancy levels.

In summary, our full year outlook continues to forecast cash NOI growth of 1% to 2% for our same-store medical office assets.

Turning to our overall company financial results and our outlook for the year. We delivered a strong start to the year with solid financial results, excellent capital allocation and an even stronger liquidity profile.

Income from continuing operations per share for the first quarter 2017 grew 22% to $0.44 compared to the first quarter of 2016. First quarter normalized FFO totaled $1.03 per fully diluted share, a modest decline versus prior year. First quarter results were driven principally by strong property performance, offset by the impact of 2016 dispositions and a higher share count.

We closed on over $1 billion in attractive new investments in the first quarter, including the expansion of our acute care hospital platform through a $700 million loan investment to scale Ardent to the second largest for-profit private hospital system in the U.S. We also invested $130 million in high-quality university-based life science buildings, which added an exciting new affiliation with Brown University.

We're also on track with our continued portfolio optimization and capital recycling efforts. In the first quarter, Ventas principally sold senior housing properties and also received final repayment on loans receivable for proceeds of approximately $100 million, with gains exceeding $40 million.

Our efficient and effective operating model was on display in the quarter. Cash flow from operations increased by 21%, driven by cash earnings, and we absorbed the life science acquisition without material incremental G&A cost to the company. We also moved, as planned, to a forward-looking long-term equity incentive plan as a result of investor feedback, with a modest noncash transition cost excluded from FFO in the quarter and expected for the year.

We made great strides in enhancing our liquidity and maturity profile. We raised $800 million of 5- and 10-year senior notes to extend our maturity profile of debt. We also closed this week on a new revolving credit facility, increasing our immediately available borrowing capacity from $2 billion to $3 billion, extending our maturities through 2021 and improving our pricing and terms.

Our long-term track record of growing cash flows on a strong balance sheet resulted in an impressive oversubscription from our banking partners, and we sincerely appreciate our lenders' strong support of the company.

Our credit metrics in Q1 included best-in-class fixed charge coverage of 4.6x, debt to growth assets of 40% and secured debt to total indebtedness holding steady at 6%. Net debt to adjusted EBITDA rose modestly to 5.9x, a temporary increase which we expect will reverse when the disposition proceeds in our guidance are received in the second half of the year.

Let me close out the prepared remarks with our reaffirmed full year 2017 guidance for the company, including the following: income from continuing operations is expected to range from $1.72 to $1.78 per fully diluted share; normalized FFO per share is forecast to range from $4.12 to $4.18; total portfolio same-store cash NOI is anticipated to grow 1.5% to 2.5%, while segment level growth expectations also remain unchanged. Our guidance continues to assume that our capital recycling program will generate approximately $900 million in disposition proceeds, of which $100 million has been closed to date. The outlook includes $700 million in proceeds and a gain exceeding $650 million through the expected sale of 36 skilled nursing facilities in the back half of the year.

Investments included in guidance consists principally of the $1 billion of investments completed year-to-date. In addition, our total development and redevelopment funding is expected to approximate $350 million for the year, demonstrating the progress in allocating capital to these high-return projects and scaling our life science and innovation business. Consistent with previous practice, we did not include any further material investments, disposition or capital activity in our outlook. We assume approximately 358 million weighted average shares for the full year of 2017. We do not assume any new equity issuance in our guidance.

To close, we are pleased and excited by the strong start to the year and committed to continued excellent execution of our strategy and our priorities.

With that, I'll ask the operator to please open the line for questions.

(Operator Instructions) Our first question comes Smedes Rose with Citi.

It's Michael Bilerman here for Smedes. Debbie, I wanted to pick up on your final comment where you talked about inquiry from capital -- equity capital sources, and also the fact that they're interested in your space. Can you talk about how those discussions are going about whether you want to use that to liquefy some of your holdings? Or are you looking at as co-invest for new investments?

Thanks, Michael. So what, I think, is really important, as I highlighted, are these -- the incredible interest in this space from existing players, new entrants of all types, and there are good reasons for that interest. The way we look at it is that every environment is going to give us an opportunity to create value. And we view that interest as one more tool in our toolkit that could be used either to team up for growth and/or it could be used to recycle capital or both. And it will depend on the individual situations and opportunities but it's a very positive development.

I guess are you close to doing anything, either selling existing assets? Or do you think there is capital partners to grow and advice to know how at the forefront this is for you?

I would say it is very knowledgeable, but nothing imminent.

And our next question comes from Michael Carroll with RBC Capital Markets.

Deb, can you give us a little bit more color on the Kindred SNF sales and what type of hurdles that are left to clear for both of you and Kindred in order to complete those sales?

Sure. Let me recap the transaction for you. And this is a very mutually beneficial transaction for Ventas and Kindred, and the 2 companies worked very well together to enable Kindred to achieve its strategic objective of exiting the SNF business. So the way it works from our side is, Kindred will either purchase from us, in connection with third-party sales or otherwise, 36 SNFs for $700 million. Or as an alternative, if that does not occur, they would renew those 36 SNFs out through 2025. At the present time, we expect Kindred to -- we believe transaction is on track to sell those assets, as Kindred has stated publicly, and that's our current expectation. But either way, we're in a good position as we look forward on those 36 SNFs.

Okay. And then, I guess, last question. Looking at your LTAC coverage ratios, and correct me if I'm wrong, I believe that you previously indicated that coverage could drop 30 basis points with the patient criteria rolling out. So is it safe to assume that coverage should stabilize at this level and maybe improve over time?

Well, as Bob pointed out, the LTACs just started going through their patient criteria. And the trough of that, we expect to see really through mid-2017 and then would presumably start to improve through the back half and into '18. And remember, we report on a trailing 12 basis. So we'll be well into '18, I think, before you see the impacts of the coverage improvement, although sequential quarters should expect to see an improvement in the net mitigated impact of criteria towards the back half of '17, subject, of course, to seasonality as we see in that business.

Our next question comes from the Juan Sanabria with Bank of America.

Just a couple of question on -- following up on the Kindred question, do you see any risk from, I guess, the lower-than-expected CMS initial rate increases as per their first set of guidance on that rate increases for 2018 and the changes in the reimbursement for the higher therapy minutes? Do you see that as a risk at all for the dispositions?

Well, I see you were up late last night reading the CMS website, so good for you. As you correctly point out, the market basket came out for fiscal year 2018 for the SNFs last night. It's a 1% increase, which is in line with what we expected from several years ago. That was what was penciled in a couple of years ago. In terms of proposed rule to change some of the reimbursement for 2019, which is what I think you're talking about, I would say that this has been on our radar screen for quite a long time as we've looked at the higher therapy utilization. And so this is, at some point, an expected change from us. I think the important point is that it is intended to be revenue-neutral. There's a long way from here to a final rule. And I think it's really just something that for us will be not overly relevant as SNFs will be 1% of our business, but I do see that this is where CMS and OIG and the other regulatory authorities have sort of targeted, which is to adjust that and shift the way they pay the SNFs away from some of the ultra-high therapy categories and really into the nursing and care component of the business.

And then the second question on the RIDEA business, solid start to the year, particularly on the expense control, as you flagged. But what should we think of in terms of occupancy and especially the expense control for the balance of the year and your ability to recapture lost occupancy from the flu?

Yes, Juan, it's Bob here. And I agree, a positive start to the year, 2.9%. Quite happy with that. And within that, in particular, the rate growth we see on an adjusted basis for the day, year-over-year over 4. That was a really important sign for us for the quarter and for the year. So that's really encouraging. The occupancy change certainly impacted by the flu and new supply coming online, in line with what we had told you back in February. I think I mentioned we were probably the 200 basis points downrange. I think that's probably a good place to pencil in for the balance of the year. We are starting from a lower point as we enter in the second quarter. We'll follow seasonal patterns obviously, but we expect there's still to be a gap, and that's principally with new construction coming online. The important thing you highlight to is, it's not only price, it's expenses. It's nice to see expenses in line with revenue, and that driven in part by controlling your cost, flexing labor versus occupancy to make sure you protect your margin, and we saw that in the first quarter. So that's an important part of the balance of the year.

So you expect that to continue that lower expense growth?

Well, you have the wage pressure, we've talked at length about, that continues to be part of the equation for sure. We've said 4% to 5% for the year. We saw about 4% in the quarter. So it's really our job to make sure we're mitigating that to these other means, flexing labor, driving the indirect costs to hold that in line with revenue. So that's the job to be done.

Our next question comes from Nick Yulico with UBS.

Turning back to the same-store expense question, Bob, the 1.9% in quarter. I mean, if I look here, that was the lowest level you've had since the end of 2014, and you've been running sort of 3%, 4% since then. So I was hoping you could unpack this a little bit more and explain it. I know you talked about flexing labor, but it's still a little bit hard to understand how the expense growth that could have been so low in the quarter.

Well, thanks for asking. I think an important thing to highlight is this extra day last year versus this year. That has -- that clearly has an impact, both on expenses and on revenue. Depending on how you build, there's a revenue impact. And in some cases, for us, we have operators that build by the day. And when I talked about the REVPOR adjusted above 4%, it's recognizing that fact. But obviously, for expenses, it has an impact across the portfolio. And so that is one of the items you need to ledge. You look at 1.9% year-on-year, or even sequentially, you have to factor in the days impact. So there's an unusual item there I would highlight.

Okay, that's helpful. And then one other cleanup accounting question here. You had $2 million of merger deal cost on your income statement, I thought acquisition costs are generally not being expensed anymore. Can you just explain what that related to?

Good catch. We'll continue to have, and you'll see in our full year outlook, money in that line item. Things like dead deal costs will run through there. So not every deal happens. Clearly, because of the new rules, you'll see some capitalized with successful deals, but what you basically see running through there are run rate costs on deals that don't happen.

Okay, that's helpful. And then just last question, Debbie, for you on medical office. From talking to brokers, sounds like cap rates have come down to around 5% for some of the highest-quality medical office product year-to-date. So I'm wondering whether you can still expand your MOB business through acquisitions given where pricing is today.

Thanks, Nick. I would say that we're very happy to have a large and attractive medical office building business and believe we've created a lot of value in terms of the time that we acquired the business and how we've scaled it probably 7x since we got together with Todd and his team back in 2010. And I am excited about the continuing compression in cap rates that ties exactly to what I was talking about in terms of the institutional interest in our asset classes, MOBs being a prominent one. And people really, really love the assets. They're sort of core-like qualities with still slightly above core returns. And so I'm excited about where the valuation is.

Our next question is from Tayo Okusanya with Jefferies.

Just a couple from me. The line of credit and the expansion on it, is that -- I mean, are you guys signaling you expect to be more involved in transactions going forward? Like is that expansion signaling anything to us?

It is a direct result of what we outlined as our strategic priorities. I think that in this environment that we have, we believe that liquidity is an important competitive advantage. And as I said, it is offensive and defensive, and it enables you to take advantage of opportunities through financial strength. And it also protects shareholders' capital, and those are both core values, obviously. And so we intend to maintain a strong balance sheet, but we are always active on acquisitions and having greater liquidity, we think, is our top strategic priority for the year and we've already done a great job expanding the revolver by 50% or $1 billion, so we're very happy with that.

Okay, that's helpful. Then second thing, going back to the proposed changes to the SNF case mix. I mean, again, it's understanding that you guys will have very little SNF exposure going forward, but you take a look at this for full...

Could you say that again? What did you say? I couldn't hear you.

You'll have very little SNF exposure going forward.

Anyway, I'm sorry. Go ahead, Tayo.

No worries, Debbie. I get where you're coming from. I guess what I'm trying to understand with that is, again, the theory here is that although the overall dollars may not change, when you kind of take a look at the reallocation that CMS is proposing, it seems to have some real damning impact for SNFs that historically have been very heavy in regards to utilizing the high therapy rug categories. And that seems to be like a general complaint regulators have had against quite a few of the large public SNF operators. So I guess my question is, would you expect from all those large SNF operators if this thing is going to go through to be heavily negatively impacted even though overall dollars is still meant to be roughly the same?

Great question. My -- a couple of things. One is, as you mentioned, this has been on the radar screen. I think people have been reviewing these ultrahigh therapy utilization minutes, as you point out, and this is a consequence of that. And so very much a continuation of the trends that we have expected and seen in this business. I would tell you that there is an estimate that this would, in fact, for the public operators, result in a modest diminution of EBITDAR, but the real issue is that the good operators in health care businesses are constantly working through these changes in reimbursement, typically they're telegraphed very early on. There's a lot of industry comments and there's a transition period. And so I think you have to look at potential behavioral changes, which the rules want to incentivize and, generally, you'll probably see less utilization of those therapies in those high categories, but the good operators will be able to hopefully manage through that in a relatively neutral way.

Okay, that's helpful. Then lastly on the LTAC side. Please indulge me, I do understand that the increases, the 1% mandated increase, but based on other changes that they are making, CMS is actually forecasting overall LTAC payments come down about 3.75%. Again, when you kind of take a look at that and understanding what Kindred is doing, what do you generally expect the impact of that to be to the LTAC industry?

Yes, and that's exactly what we factored into, what we were talking about before, in terms of there was a very specific guidance provided by Kindred, whose a leading LTAC operator, of what the mitigated and unmitigated impact is and what our share is expected to be as it affects coverage. And the 2018 CMS rule is perfectly in line with our projections and Kindred's expectations. Kindred is mitigating the impact, again, as we talk about how operators do this through taking more site-neutral patients and that's becoming an important part of the business, driving volume and then hopefully being able to contain cost. And so that is how Kindred has expressed its ability to mitigate the impact of those changes. And again, very well telegraphed and understood, and it's up to Kindred then to execute its business plan within that context.

Our next question is from Vincent Chao with Deutsche Bank.

I just wanted to go back to the SHOP conversation. We talked about the occupancy staying at the sort of the minus 200 basis point level year-over-year, just given the flu plus also the supply coming online. But I'm just curious in terms of the revenue growth, which was very strong -- I'm sorry, the rent growth this quarter. With occupancy down and supply coming up, I mean, how much do you think rent growth will be impacted going forward?

Great question, and I probably sound like a broken record here, but I do believe we have strong pricing power in senior housing, full stop. And our approach, as we thought about the base rent increases this year, was looking where we had advantaged positions, high-barriered entry markets with pricing power and pricing to reflect that, not only at base rent, but also in care provision. And we did not see financial move-outs quote as a consequence of any material kind, and that, to me, is really encouraging. Where we see -- clearly see pricing pressure is in the markets where new supply is coming online, and that's no surprise, that's as expected. And in that situation, we're a price-taker, and we need to make sure we're watching occupancy vis-à-vis price. And the good news for the portfolio overall and the high-barriered entry markets we compete in is that drives overall growth for the portfolio, but it's really a tale of two cities as you look at the different markets.

Okay. And then on the 5.5% supply as a percentage of inventory in your markets, can you -- do you have a sense of what that might trend to? I mean, it sounds like it will get worse over the course of the year, but just curious do you have a sense of what that will turn into by the end of the year?

Yes, it's -- it has been trending consistently flat for our portfolio here, for about 3 periods in a row, which we're encouraged by.

And that's start. That's starts.

Percentage of inventory when restated, as NIC does, we do now to be able to see what is the like-for-like, period-to-period. And in that basis, we improved modestly in this period. So that's encouraging. I also noted at the same time, and this is not unusual, more of that construction rolling forward and being pushed into future quarters in terms of when it's expected to start. And that is a dynamic we've seen and continue to see that file wave a bit moving forward. So we'll see where it goes, but 3 periods in a row now of being flattish is encouraging to us.

Okay. And one just maybe cleanup question. In the commentary on the MOB same-store NOI growth for the quarter, the lease termination fees were kind of noted as a positive variance. Do you have a dollar value of that lease termination fee?

It's slightly over $2 million. So when adjusting for that, you come back to 1.5% growth on a more underlying basis, pretty much in line with our 1% to 2% guidance.

Our next question comes from Chad Vanacore with Stifel.

So just thinking about same-store SHOP occupancy, which was down significantly a 150 basis points, that's more than NIC MAP data would suggest, but, Bob, you had mentioned last quarter you expected somewhere around 200 basis points. So does that imply further declines in second quarter? And then do you assume any occupancy recovery late in the year in your budget?

Yes. I think it's -- we certainly foresaw some of the impact here on the flu when we had the February call, and that clearly is an unusual item as you look at the quarter. I mean, the sequential impact, there's always a softening in the quarter sequentially, but that was exacerbated I think by the flu, no doubt. That 200 basis point range is really for the full year and reflects the range we've given of guidance overall. So we're starting from a lower point. There is new supply coming onto the balance of the year. And, therefore, that 200 basis points is part of the range of expectation going forward. Now I hope we can do better. I hope we have -- we're at 160 now down, I hope we can tighten that gap. And again, that's what the operators are very focused on, but the range reflects that gap being either consistent or slightly wider based on new deliveries.

And are those pressures more concentrated anywhere by geography?

Oh, sure. So the new construction will not be surprising to you as you look at the NIC data. Markets like Atlanta, Dallas, Detroit, Chicago, that's where the pressure is, and that's the 30% we talk about within our SHOP portfolio where the pressures are. But again, the New Yorks and L.A.s and San Frans are powering along and very strong.

All right?

Yes, great. And just one more. 1Q CapEx was under the average for the year. When do you expect that to ramp up? Guidance implies an increase about $10 million a quarter through the balance of the year.

Right. So we are about $25 million in the first quarter. Our guidance is in the 1 30 range. So clearly a ramp on the balance of the year. It's very typical to see, in the back half in particular, that spend to ramp.

All right. And then what's the split of CapEx spend between MOB and SHOP?

Core FAD CapEx. Give me a minute, we'll get back to your with that number.

Yes, we have to move along. We have a few more callers that we'd like to take questions.

Our next question comes from Rich Anderson with Mizuho Securities.

So what's -- every new day seems a new message from the administration as it relates to the U.S. health care. I'm curious to what degree that's affecting your kind of investment strategy in the hospital business specifically. I know you know quality, growth and all that, I get that. But I mean is there -- there has to have been some change when you consider all these inputs and outputs from the Trump administration. Is that true?

Well, I would say that you're right that one day it's terminating NAFTA and the next day it's not and the next day it is again. And so there's a little bit of policy whiplash going on across all businesses, certainly including ours. And we have always said that we believe the hospital business is a huge secular opportunity for us as the leading capital provider, and that we would do business with high-quality assets and in high-quality providers, and I think we've done that. Right now, our focus is on the integration of LHP and Ardent, which we said is going well, and we're continuing to do work. But, obviously, we'll be very, very selective in allocating capital while there is a wide range of possible outcomes. I would say that most of our hospital customers and relationships and clouds business are kind of full speed ahead with all of the things that they have been focused on for many years which are unrelated to repeal and replace, and its value-based care, it's cost containment, it's quality, it's expansion of market share, et cetera. And so to summarize, we continue to believe it's a great opportunity for us, long-term. We have been selective and we'll be -- continue to be selective. And we think that right now we're cautious, but continuing to work in the business with our customers.

Right. And then in 2009, circa 2009, you were given credit for hunkering down, protecting the balance sheet and not necessarily being overly aggressive from an investment standpoint. You just said we're always active on acquisitions, but do you see yourself in more of a hunker down mode? Are you -- do you -- if there was a 0 acquisition year, would that be a bad thing for Ventas?

Well, thank you for the walk down memory lane there. We did get an A+ for reading the market right and protecting the firm, which enabled us then to come out of the financial crisis early, faster, stronger and then go back into growth mode. I think we are always reading the external environment. We are nimble. I think we've been able to find ways in different environments to create value. And certainly, the liquidity is an area of focus from a opportunistic and risk-management standpoint. We've already closed $1 billion in attractive investments and we have, really over the last 18 months, I would say, shifted our capital allocation efforts really into the selective hospitals, customer-related deals and the high-quality investments and future growth with the development -- redevelopment pipeline. And that's what we foresaw, and I think we're in exactly the spot where we wanted to be on those things, coupled with really smart dispositions.

Our next question comes from John Kim with BMO Capital Markets.

Debbie, on the capital sources that you mentioned are looking to invest in the market. Do you expect they're going to be price leaders in any particular asset class and drive values up?

I don't -- could you repeat the question? I'm sorry.

How competitive do you think they will be on pricing versus REITs?

Well, I think that there is a strong bid. As I pointed out in our asset mix, our assets extremely valuable. I think this has been going on, again, for a while and it continues without abating. And it's, in fact, accelerating. So that makes our assets more valuable and it requires assets we have done to shift our focus on capital allocation to where we see the best risk-adjusted returns. And that is -- has been in -- you can see this -- a funding of the organ expansion, where we're getting almost an 8% -- almost a 9% return, good risk-adjusted returns, scaling the platform. We're investing in these higher-yielding, yet high-quality and future growth development, redevelopment opportunities, and we're doing smart dispositions among other things. So there are always ways -- we like it that our assets are more valuable, but there are always ways, given our position in the market, given our diversified portfolio, given our relationships and platforms, where we can invest attractively. And that's what we're doing.

And the debt deal cost that you recorded in the first quarter, was that related to Brookdale?

No, it was not.

Our last question comes from Michael Knott with Green Street Advisors.

Question for you. On the SHOP portfolio, still trying to understand. It seems like you guys said it's encouraging to, but it seems like it was just outright better than you expected on -- in terms of occupancy and on the expense side, but I guess should we infer that it's really just a timing issue that the flu has kind of blood into 2Q in terms of occupancy? So just trying to better understand that. And then also if you can cut it through between U.S. and Canada, and then the better markets versus the worse markets where you talked about last quarter, the bifurcation in terms of those 2 types of markets.

It was a good quarter.

Absolutely. We are very pleased with it. And let me talk about the markets a bit, thanks for asking. The Canada result continues to be really strong, 7% in the quarter. We saw similar growth last year. Occupancy is pushing 95%, and we see real opportunity for further pricing there. So -- and we have a wonderful portfolio in that country. So that's really powering in helping the business. And similarly, I keep talking about the engine room markets in the U.S, New York, L.A., San Francisco, Boston. We continue to go from strength to strength in those markets and the pricing is really taking hold there, and that's really positive. The other part of the portfolio continues to be the same markets, and you'll know as well as I which ones those are. And again, the competitive pressure we see there is on price. We see labor pressure there, it's all the same dynamics we expected are happening. But overall, those strong markets are driving the business and we had a strong start, so we're encouraged.

So -- but was it better than expected across-the-board? Or did Canada do better than you expected and the U.S. was kind of as expected?

It was pretty consistent with expectation, I'd say.

Great. So with that, Ryan, I think we've completed all the questions. And I just want to close by saying that we are delighted we were able to deliver strong results this quarter across-the-board. We have a great high-quality, diverse and balanced portfolio, great financial strength and liquidity. We've been expanding our leading platform, focusing on cash flow and cash flow growth and value creation, and we have a great team here at Ventas that's working hard for you. So with that, I want to just say, let's go, Pens. And with all due deference to our friends in Washington, and we look forward to seeing everyone soon. Thank you very much.

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