芬塔 (VTR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ventas Second Quarter 2017 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 from Investor Relations. Sir, you may begin.

Thanks, Terrence. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended June 30, 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. 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, 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 statements 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 second quarter earnings call. I'm delighted to be joined this morning by my Ventas colleagues.

We've continued our momentum this quarter by delivering really good results, growing cash flows and executing on our strategic objectives. I'll touch on performance briefly and focus on our continued capital allocation strategy, our leading operators, our formula for value creation, macro trends and our great people. Following Bob's review of our financial results, we'll be happy to take your questions.

The second quarter continued our pattern of strength as we delivered growth in our normalized FFO to $1.06 per share, driven principally by property NOI growth from our high-quality, diverse portfolio and excellent investments. We are delighted to reaffirm our full year guidance of $4.12 to $4.18 per share compared to $4.13 in 2016. This expected growth in normalized FFO per share at the midpoint of our range is notable because we are simultaneously completing $1 billion of dispositions to improve our portfolio, we continue to strengthen our balance sheet and we are investing in future growth through selective development and redevelopment.

As an enterprise, Ventas is and always has been focused on delivering consistent, reliable cash flow and dividends from a high-quality, diverse portfolio on a strong balance sheet, and we are proud that we are continuing to do exactly that.

After a terrific start to the year, we continued to make significant progress on our capital allocation priorities. Here are some examples. To invest in our future growth, we committed to 4 Class A senior housing developments or major redevelopments in terrific locations with our leading operating partners, Atria and Sunrise. These are mutually beneficial arrangements with long-standing operating partners and in the case of Sunrise, the developments flow directly from the revised agreements we reached with Sunrise last year.

We also allocated capital to help other customers grow during the quarter, including a modest expansion of our senior housing footprint in the U.K.

A major piece of our capital allocation strategy, which of course includes decisions about where to grow and where to shrink, has been to reduce our investment in skilled nursing facilities, or SNFs, and Medicaid programs. Here too, we have made demonstrable progress. Kindred recently announced it had signed a deal to exit its entire skilled nursing business. As part of that transaction, we expect to sell our 36 SNFs for $700 million at a very attractive 7% cap rate on cash rent. With the sale, SNFs will represent only 1% of our NOI and our private pay revenues as an enterprise will rise to 94%.

Our top capital allocation priority for reasons I'll describe more fully in a moment, is expansion of our institutional university-based life science business, which now accounts for 6% of our NOI. In Q2 alone, we have opened 2 brand-new assets, South Street Landing and the Chesterfield, where we expect Brown University and Duke University, respectively, to take occupancy by year-end. And we've broken ground on 2 new ground-up developments, one in U City adjacent to Penn Medical in Philadelphia; and another, affiliated with Wash U in St. Louis. Our pipeline of additional development and acquisition opportunities remains robust as our leading platform, Wexford, continues to use its sterling reputation and experience to assist top-tier universities in developing attractive research, medical and technology hubs.

Turning to my second topic, our leading platforms. We are pleased to highlight that Ardent Healthcare Services continues to outperform and deliver excellent results through the second quarter. With its successful integration of its strategic acquisition of LHP, with its outstanding and experienced management team and a pipeline of acquisition opportunities, Ardent has validated our 2-plus billion dollar vote of confidence in the company. Ardent now generates $3 billion in annual revenues, employs 18,000 individuals and serves patients in 6 states. We're also proud to say that 7 Ardent hospitals were recently named by Modern Healthcare in its prestigious 150 Best Places to Work list, wonderful recognition for Ardent's team, especially when you consider that Ardent operates 20 hospitals within a universe of over 5,000 hospitals nationwide.

We continue to work with our partners, Ardent and Sam Zell's EGI on further growth as we consider opportunities to acquire other high-quality health care assets and fold them into the scalable Ardent platform.

Let's now turn our attention to Ventas's demonstrated formula for value creation. As I mentioned on our last call, our diverse, high-quality assets have never been more valuable, and we continue to see all-time high pricing across asset types in the market. I'd like to highlight 2 cases in point, our medical office building and our life sciences assets that are at different stages of value creation.

Our MOB business now generates nearly $400 million in net operating income annually, comprises 20 million square feet and represents 19% of our NOI. It is 95% on campus or affiliated, with 84% of our NOI derived from buildings with investment-grade tenants and HCA. Occupancy is a robust 92%. We allocated capital to our MOB business early in the valuation cycle, before MOBs became one of the hottest asset classes, prized for its steady, reliable cash flows and increased utilization from baby boomers turning 65.

Our unlevered yield on our MOB portfolio is an incredible 7.5%, inclusive of all of our post-acquisition CapEx. Given the recent benchmarks for MOB transactions in the mid- to high- 4s, our investment has created literally, billions of dollars of value for our shareholders.

We expect our university life science business to follow a similar pattern of investment and value creation. In fact, the recent mid- to high- 4s yield on MOB sales represents a great comp for these assets given their significant similarities. Like MOBs, life science assets are fueled by an aging population dealing with illness and chronic condition. The buildings are anchored by highly rated large institutions and those institutions are the engines of economic growth in their communities and magnets for other tenants.

Our university-based life science portfolio of 25 operating assets stacks up favorably from an analytic standpoint to recently traded MOB portfolios. Our 25 assets are better occupied at over 97%, newer with longer lease terms and a higher proportion of credit tenants. Yes, in our university-based life science business, we are still investing at 6% to 9% unlevered stabilized yields providing excellent risk-adjusted returns. Our thesis is that this attractive portfolio should ultimately be valued at cap rates comparable to high-quality MOBs. That is why we are so excited about the opportunities and are committed to dedicating significant capital with Wexford to build out this attractive value-creating business.

Turning to the macro front. Political and policy uncertainty continues to weigh on health care, taxation, regulation and trade. Washington has been wildly unpredictable, although last night's, or I should say this morning's early morning vote should restore some stability to the health care environment as the majority leader of the Senate concluded that it is "time to move on" from the efforts to repeal some or all of the Affordable Care Act.

Now the real estate community can buckle up for the tax reform roller-coaster ride as major changes to the tax code are proposed, many of which would have significant consequences for all public and private real estate companies. Yet the debt and equity capital markets remain remarkably favorable. Therefore, our view is that we should in all events remain financially strong and liquid, maintain diversification and balance in our portfolio, continue to drive cash flow and efficiency in our enterprise, allocate capital wisely, stay nimble and opportunistic and continue to elevate the mix and quality of our portfolio.

We want the Ventas team to work together to deliver superior long-term performance and reliable enterprise growth and income on a strong balance sheet to our holders.

Before I turn the call over to Bob, I do want to touch on the extraordinary and cohesive Ventas team and a planned change we announced this morning. Todd Lillibridge will transition to a senior adviser role at the company in early 2018. We intend to commence the search for a new leader of the MOB business promptly and expect to complete the transition in the first quarter of 2018. Todd has committed to leading the Lillibridge MOB business until his successor joins us when we expect him to undertake a variety of responsibilities and initiatives for the company. As you all know, Todd is a great partner. He also happens to be a visionary who founded his namesake firm over 25 years ago with the goal of providing comprehensive real estate solutions to high-quality health systems.

Todd pioneered the idea of MOBs as a unique institutional real estate asset class. He created a strong enduring company, Lillibridge Healthcare Services, that we were lucky to combine with in 2010. Since then, we've grown the MOB business together by an amazing 7x. We look forward to continuing to work with Todd and his team to deliver strong MOB results and lead a smooth transition to a new MOB leader.

Todd's commitment to our organization and his colleagues and clients is truly exemplary and gives you some insight into the special Ventas culture. That commitment extends throughout the Ventas team. We are aligned, consistent and focused on the success of the company and our colleagues. Unquestionably, the strong culture and our people create our winning competitive edge and underpin our long-term growth, reliability and performance.

In sum, I'm confident that we have the right portfolio mix, relationships, strategies and team to capitalize on our exciting position at the dynamic intersection of health care and real estate for the benefit of all of our stakeholders.

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

Thank you, Debbie. In the second quarter, our overall portfolio of health care, senior housing and office properties grew same-store cash NOI by 1.5%. Let me detail our second quarter portfolio performance by segment before turning to overall financial results and 2017 guidance.

I'll begin with our triple-net business, which accounts for 39% of our NOI. The triple-net portfolio grew same-store cash NOI by 2% for the second quarter of 2017 driven principally by strong in-place lease escalations. Adjusting for the impact of a roughly $3 million fee received in the prior year, same-store triple-net NOI growth in the second quarter 2017 was a strong 3.5%. Cash flow coverage in our overall stabilized triple-net lease portfolio for the first quarter of 2017, the latest available information was 1.6x, a sequential decline of 10 basis points from the fourth quarter. This change in overall coverage was driven principally by IRF and LTAC coverage, which declined, as expected, by 10 basis points sequentially to 1.7x, driven by rent increases and the continued impact of the LTAC reimbursement change.

As noted in its first quarter earnings call, Kindred continues to execute on its patient criteria mitigation strategy and expects the net mitigated impact of criteria should begin to improve in the second half of 2017. As updated by Kindred and Ventas in June, we continue to expect the attractive $700 million sale of our Kindred SNFs will be completed by year-end 2017. Given the pending sale, we are now excluding those assets from our coverage and same-store supplemental reporting in current and prior periods. As a result of the sale, SNFs will represent just 1% of Ventas's NOI.

In our triple-net seniors housing portfolio, rent coverage remained at 1.3x. Rent escalators for the trailing 12 months increased low single digits, outpacing asset-level cash flows. Nonetheless, our triple-net senior housing portfolio benefits from strong lease protections, operator and geographic diversification as well as solid asset-level cash flow coverage.

Finally, Ardent's strong performance continued in the first half of 2017 with volume, revenue and EBITDA growth ranking among the top performers in the industry in the first quarter. At the asset level for the Ventas properties, rent coverage remained strong and stable at 3x in Q1. The LHP integration is proceeding very well, synergies are on track, and the team is motivated and performing at a high-level. For the total triple-net same-store portfolio in the full year 2017, we continue to expect cash NOI 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. Consistent with prior guidance assumptions, same-store cash NOI in the second quarter grew 0.4%. Unpacking the P&L further, second quarter same-store revenues increased nearly 2%, driven by attractive rate growth of over 4%. Rate growth was partially offset by 200 basis points of year-over-year occupancy decline. As discussed on our last call, the lower occupancy starting point entering Q2 due to a late and severe flu season, together with the impact of new deliveries, resulted in a widening of the occupancy gap in the quarter.

Overall expenses were contained in the quarter, increasing by 3%. Our operators continue to control nonlabor costs and deflect labor versus occupancy.

At a market level, we continue to see very attractive growth in high-barrier-to-entry markets, such as California and Canada, which drove very strong top and bottom line growth. The performance in Canada was particularly exceptional, growing NOI by nearly 12% in the quarter. Despite the strength in certain high-barrier markets, elevated levels of new building openings in select markets constrained our portfolio growth. The second quarter saw the highest number of new units coming online in recent experience, with overall deliveries of new units in our trade areas up 50% sequentially from Q1 of 2017. New openings were concentrated in high construction markets, including Dallas, Salt Lake City, Atlanta and Denver.

Switching gears to a forward view, construction in progress as a percentage of inventory within our trade areas improved by 20 basis points sequentially to 5.3% in the second quarter, encouragingly representing the third consecutive sequential improvement in this metric.

For the full year 2017, we are maintaining our SHOP portfolio same-store NOI guidance range of 0% to 2% growth. The guidance range is a function of the level and timing of new deliveries and operator execution in the back half of the year. The high end of the range implies roughly 2% year-over-year NOI growth in the second half, driven by delayed new openings and the resulting occupancy gains. Conversely, the lower end of the SHOP guidance range implies approximately 2% NOI year-over-year declines in the second half, assuming accelerated new openings further widens the year-over-year occupancy gap.

As a modeling reminder, like last year, NOI should be lower in dollar terms in the second half versus the first half of the year as a result of technical factors like the number of days in each period. So SHOP performance seems to be playing out as we predicted when we initiated our 2017 guidance. Our SHOP operators are sharply focused and incentivized to manage our SHOP assets with excellence to ensure bottom line performance in 2017.

A final note on senior housing. We're encouraged by strong demand reported by NIC in the top 99 markets where absorption reached almost 3% in the second quarter. This supports our view of the strong value proposition of seniors housing and with our premium real estate located in high-quality markets, we are well positioned to take advantage of the coming demographic tailwinds.

Rounding out the portfolio review is 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 very well through the second quarter.

Sequentially, new leasing drove a 90 basis points occupancy increase to an excellent 97.5% while revenues and NOI increased almost 4%.

In our highly valuable medical office business, same-store cash NOI in the second quarter increased by a healthy 2.2%. Second quarter results benefited from approximately 2% revenue growth driven by low single-digit rate increases together with year-over-year and sequential occupancy gains. Given the higher-than-normal level of lease rollovers in 2017, our team has done a terrific job in managing occupancy by driving new leasing and maintaining strong tenant retention that exceeds 80% year-to-date. Our full year outlook continues to forecast same-store 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 excellent results and enhanced financial strength in the second quarter. Second quarter 2017 income from continuing operations per share grew 5% to $0.42 compared to the second quarter of 2016. Normalized FFO per share in the second quarter grew 2% to $1.06 compared to the second quarter of 2016. Second quarter results were driven principally by accretive investments and improved property performance versus prior year.

Ventas funded investments of $110 million in the quarter, including $53 million of acquisitions helping our operator partners grow in our seniors housing triple-net portfolio and $57 million of funding for our share of development and redevelopment projects currently underway.

To fund investments, Ventas issued and sold 1.1 million shares of common stock under the ATM program for net proceeds of $74 million and sold properties and received final repayments on loans receivable for proceeds of $45 million. During and following the quarter, we also committed to future growth through new development and redevelopment projects in seniors housing and MOBs with total project costs of $188 million. We continue to drive enhanced financial strength through excellent capital raising. We tapped the attractive Canadian bond market in May and issued CAD 275 million 5-year notes at 2.55% to refinance short-term low rate Canadian debt, thereby extending our debt maturities while providing natural currency hedges.

Meanwhile, Ventas delivered attractive cash flow growth in the quarter with 5% growth in net cash provided by operating activities. Ventas also paid a quarterly dividend of $0.775 a share, representing a 6% year-over-year increase as well as a well-protected FFO payout ratio below 75%. The result of this cumulative activity is an even stronger financial position. Net debt to EBITDA grew 10 basis points sequentially to 5.8x, which we expect to further improve upon receipt of disposition proceeds by year-end. Fixed charge coverage remained best-in-class at 4.6x and secured debt to total indebtedness improved sequentially to 5%.

Let me close out our prepared remarks with our reaffirmed full year 2017 earnings and same-store guidance for the company, including the following: we continue to expect income from continuing operations to range from $1.72 to $1.78 per fully diluted share; our normalized FFO per share forecast continues to range from $4.12 to $4.18. It is a testament to the strength of our portfolio that even with all the expected portfolio changes, asset sales, leveraging, the funding of developments and senior housing supply, our normalized FFO grew year-over-year in Q2 and is expected to grow full year at the midpoint of our guidance range.

Total portfolio same-store cash NOI is anticipated to grow 1.5% to 2.5% while segment level same-store growth expectations also remain unchanged. The $700 million Kindred SNF sale at an 8% GAAP yield is expected to occur in phases beginning in the third quarter and to be completed by year-end 2017. The high end of our current FFO guidance range assumes the majority of proceeds are received late in the fourth quarter of 2017. Earlier, larger dispositions, coupled with the associated pay down of 2% LIBOR-based debt, will reduce FFO by approximately $0.01 per share per month. Upon completion of the SNF sale, Ventas is expected to record a gain exceeding $600 million, which will increase the company's net income per diluted common share.

Consistent with previous practice, we do not include any further material investments, dispositions, loan repayments or capital activity in our outlook. We assume approximately 359 million weighted average shares for the full year 2017 with no new equity issuance contemplated.

To close, we are pleased with our performance in the year and our progress in executing on our strategic priorities.

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

(Operator Instructions) And our first question comes from Michael Carroll from RBC Capital Markets.

Debbie, can you give us some color on the companies or the company in which you guys are tracking in the acute care hospital space? And is the plan to mainly grow with Ardent? Or you willing to make investments with different operators?

Good morning Michael, I would say that we are involved in both undertakings. As you know, when we first invested with Ardent and with Sam Zell, we believed it was a scalable investment opportunity because of the high-quality team there and the good platform. And that has played out exactly as we expected and I would continue to expect that there will be opportunities with our partners to grow there. And we also, in a very selective way, could pursue opportunities with high-quality health systems so long as they share the kind of characteristics that we're looking for, which I would describe as mini-HCA type characteristics, which are basically great market share, good payer mix, good branding, opportunity for margin improvement and so on. So we've been very consistent in that regard. It is a gigantic market, and we're focused on a very high quality slice of it, both with Ardent and separately.

Okay. And then I guess, I'm not sure if we're done with the repeal, replace, seems like everything comes back I guess every week or so about something new that could be passed, but as we get more clarity on the new health care environment and what's the GOP may or may not do, do you believe that Ventas can be more aggressive deploying capital in this space?

Well, again, we are going to be consistent and very selective in the types of investments we will make in this trillion dollar highly fragmented sector. We've talked about Todd's expertise over the years. We really are experts, both in our management team and our board, in identifying the kinds of opportunities we think fit with our strategy. It is helpful certainly that we may have more clarity given the Senate majority leader's view that it's time to move on to, as I said, tax reform and defense bills and so on. And so that's helpful, but this is a long-term secular thesis that we have that will play out over decades and so we're going to continue to pursue that with consistency and strength and I believe we'll be successful at it.

And our next question comes from Smedes Rose from Citi.

I wanted to ask you on the SHOP assets for the U.S. portfolio and you sort of talked about some of the ranges for the outlook. So could you see that being negative for the year? Or do you think that will -- are you guys expecting that to improve in the second half back into positive territory?

Hi Smedes, thanks for the question. The range obviously of 0% to 2% for the year, which we reconfirmed today, really recognizes that new deliveries are a primary driver of the performance in the balance of the year. Difficult to predict clearly, so we think it's appropriate to have a range for the back half of the year and we are pleased with our start. I think it's fair to say we're right where we expected to be, whether it be top or bottom line, but the balance of the year and that range is really a function of those new deliveries. So we'll have to see how that plays out.

Well, just on that front, are you seeing any changes in -- or hearing about any changes in capital availability for construction in senior housing?

Yes, yes.

Yes, anecdotally, it is continuing to get more difficult. Financing is getting more difficult. Finding a good operator is getting more difficult. I mentioned that we've had 3 now periods in a row where the construction to inventory metric has improved so that's encouraging. So anecdotally and quantitatively, I think we've seen some positive trends.

And our next question comes from Nick Yulico from UBS.

Just first question on Todd Lillibridge. I guess I'm wondering -- I was reading through the filing. First off, it's not clear. It sounds like there might -- there's not much of any G&A impact, is -- maybe you can just clarify that.

I don't -- I think you're right that it will be not much of a G&A impact, that's correct.

Okay. And then is there any, I guess, the plan there, are you planning to keep the Lillibridge name? And is there a noncompete for Todd?

Well, we were very happy to acquire Todd's business in 2010 and combine forces with him. And we like his name and so we are going to keep it. He likes it too, so he'll probably use it. Like all of our executives, Todd has a 12 months no compete after leaving the company and we hope he'll stick around for a while doing lots of good things for us after he transitions the MOB leadership role.

Okay. And then Debbie, I just wanted to ask you about acquisitions. If you look at your leverage, your balance sheet puts you in a good position to do a larger acquisition, so I wanted to hear your thoughts about the investment opportunities out there. You mentioned asset pricing being strong across health care real estate. So does that restrict your acquisition opportunities?

Well, we are in a great spot, as you correctly point out and I think we can compete and win in transactions where we are focused on winning, and that's a great spot to be in. We have really picked our spots and been very clear about our capital allocation priorities over the last couple of years and I think we have the ability to really execute on those and so we feel really good about that.

Okay. I guess just going back to the pricing commentary. I mean does that relate to specific asset classes, like medical office, where pricing has gotten pretty aggressive and maybe a little bit more difficult to do acquisitions versus some of the other types of real estate you're looking at?

Yes. I mean, we like what we see in terms of value creation, as the institutionalization and performance of, for example, the MOBs is now sort of a mid- to high-4s cap rate. I think in senior housing, we have grown with customers. We have been selective, and we've focused on some high-quality development and redevelopment, both in MOBs with our Sutter project in downtown San Francisco and in senior housing with our new projects with Sunrise and Atria. And then we continue to build this life science business where we see great opportunities and selectively in the hospital and health system business as we discussed. So there's lots of opportunity for us to do that. And when we see investment opportunities that really add to our strategic direction, add to our portfolio, accomplish things and are high quality, I think we can very well compete and win on those opportunities.

And our next question comes from Rich Anderson from Mizuho Securities.

So on -- the life science is kind of a priority growth platform for you right now. Can you comment on the size of the university market for that? The competitive landscape? And then as an anecdote to that, you mentioned you're buying in the 6% to 9% range, but you think it's worth a 4%-handle or maybe a low 5%. Do you feel yourself in a competitive advantage in a sense that you may not be consensus among other investors in the space and so you could be a little bit more aggressive to win deals? Is that a fair way to think about it?

Yes, this is John Cobb. And I think -- we think the size of the market is $4 billion to $5 billion or pretty big. We feel that with the Wexford brand and our brand, we have a great value proposition to the universities. Where we see the 6% to 9% is really on the development side. We think that when you -- we can build to those yields, what we're doing in U City and Penn and Wash U, that once we build them, fill them up to 95% occupancy, we think that's where we get the value creation.

And what's really interesting, just another stat on that, is the existing tenants that we have, these universities, Brown and Yale and Duke and U Penn, just the existing portfolio of 25 assets, those universities account for 11% of all U.S. R&D spending by universities. We think we can expand with those tenants and are working on that. Then there's another cohort that really accounts for the next kind of 30% of U.S. university R&D spending, and that's where we're targeting and we have ongoing discussions with Wexford with virtually all of that next cohort. So that's kind of the target market, Rich.

Okay. So beyond universities in terms of the buyer pool for this asset class, who are you competing with?

We pretty much, as John said -- I mean, I think, we have a great opportunity with limited apples-to-apples competition because of Wexford's brand, relationships and track record where the universities see us and then our institutional nature partnered with them so they see those completed projects, they see the brand names that have already had success with this. They see us with our institutional long-term hold and I think we really have the market pretty much in an attractive spot for us to win a large percentage of these development deals. And that's why we're excited about continuing the opportunity.

Okay. And then last question, a lot of talk about how health care could fill the void for e-commerce and retail establishments, and of course, we're seeing that in many respects with some of the different levels of -- types of care that you can get in a retail environment. Do you see -- how do you see that evolving over the next 5 years or so? Do you think like Macy's and Sears, these big blocks of space could somehow be occupied by some sort of health care component? Or they just too big so you really got to go smaller when you're looking at those types of execution?

Yes. Good question. What I would say is everybody wants to go where the demand is and the demand is in health care and senior housing. And so it is a great spot to be in. I would say that there may be some successful at-the-margin opportunities for that type of conversion. But in general, based on the sort of regulatory environment and new rules that are coming out, for example, that are pushing outpatient services that hospitals offer back toward the campus because of pricing changes, we think that the conversion of retail to medical, it will be a limited phenomenon over the next 5 years. And obviously, the box size is relevant as well, but I really think the way hospital and health systems really provide outpatient services is being driven by the regulatory environment back closer to the hospital campus and that's very important.

And our next question comes from Michael Knott from Green Street Advisors.

Question just on skilled nursing. It's going to be down to 1% and just curious if you're thinking about taking that all the way to 0 and with what timing.

Well, we've gone from 70% when I started, so 1%, so we're pretty happy about that. We'll continue to be opportunistic and smart as we have -- I believe, we've been in our capital allocation, which, as I said, includes disposition activities. Right now, we don't have any plans in that regard, but we'll continue to be patient and opportunistic and if we have opportunities to do anything in our portfolio in any of the asset classes, we will always look at that if we think it's going to create value.

And then on the hospital front, it sounded like you were saying it would be a possibility for Ventas to further expand in that business outside of Ardent and EGI, did I hear that correctly?

Yes, and that's consistent. I think what we have always said is this is a huge market. It's fragmented. There are a lot of high-quality, highly rated health systems that we've been doing business with for 25 years. We think the scalable Ardent platform with the management team, is a great place to do bolt-on acquisitions and we've shown that, that has been occurring, and we're very pleased with the way that is playing out and with Ardent's performance. But there also is an opportunity in this gigantic market to pursue other potential opportunities on again very highly selective basis, and that's consistent with our thesis from the beginning.

And our next question comes from Steve Sakwa from Evercore ISI.

Debbie, I was wondering if you or Bob could just maybe comment a little further on the occupancy decline in the SHOP portfolio. Was there anything regionally that you noticed in the 200 basis point drop?

Sure, I'll take that, Steve. The 200 basis points down is right in line with what we talked about last quarter. We entered the quarter at a lower point as you know from the flu, which was more severe and occurred later in the year than is normal. And then we saw the new deliveries come online as I mentioned. The regions and the locations of that new supply are the same that we've been talking about for over 1.5 years now. I highlighted Dallas, Salt Lake City, Denver, Atlanta as a few most notable. But the same NIC markets that you read about when that report comes out are the ones that we're seeing. It's contained to the same 30% of our SHOP portfolio that we've been talking about for some time, so it's not new. But there was an increase in the amount of deliveries in those markets in the second quarter.

Okay. And then I guess secondly, maybe Bob, this is for you. But just in terms of equity issuance and using the ATM, how are you sort of thinking about that and obviously the balance sheet has gotten much better, but how are you sort of thinking about raising equity capital and is the sort of primary, sort of financial determinant, sort of earnings accretion? Or I assume NAV is a much less important factor when you're looking at issuing equity.

Well, stepping back, we agree we feel very good about the balance sheet, the financial position we're in. Our net debt to EBITDA is really good. Our fixed charge coverage is fabulous. Our liquidity is really strong. Our cash flow is very strong. So we feel really good about our position and have multiple options. In the quarter itself, we did make commitments to investments of about $110 million. We funded that in part with ATM. That's just one of the clubs in the bag that we use, that's a relatively small amount, but efficient and is one of the ways that we'll fund new investments, but dispositions are another and we view that very considerably over the last year, including $1 billion this year. So multiple ways to finance ourselves.

And our next question comes from John Kim from BMO Capital.

As you look for a new leader for your MOB business, I'm wondering how you envision this business changing. Are you looking for someone with more of an aquisitive or development background or different relationships going forward?

Well, I think that we have a bias towards a leader, who will be results-oriented, proven record of accomplishment and a deep understanding of the health care industry. I don't -- if they have a nice head of hair and a great smile like Todd, that would be an added bonus, but that's generally the direction we're looking. John's team is really in charge of all of our investments, including MOB investments and so it'll be great to have a partner who can assist in that regard, but the MOB leader is really running the business.

Okay. And then earlier this week, it was revealed that Amazon has a health care division, I know it's early days still, but can you comment on how you think technology and data is going to change demand? And offer any of your asset classes?

Yes. I mean, that is, obviously Amazon has been a disruptor in a number of areas. We believe, again, why are people going to health care? And they're going to health care because that is where there is incredible, inexorable demographic demand and so everybody wants a piece of that. I do believe that technology will change and enhance the delivery of health care services as it has been doing for quite some time. And basically, it hopefully will drive down costs of providing health care in the country, but we believe that it will -- we will continue to see increasing utilization of our assets from this demographic wave that has started and will continue to come.

These technology changes, when do you think they will start to make an impact? Over the next couple of years? Or is it really longer term?

Certainly not in the near term and so over time, I mean, again, we want health care delivery in the United States to be enhanced and delivered efficiently and so our job is really to align ourselves with leading providers who are always going to be there, delivering high-quality health care services for this aging demographic, and that's our business model and that's what we're really focused on.

And our next question comes from Jordan Sadler from KeyBanc Capital Markets.

I wanted to just go back to your comments on life sciences being sort of a big area and focus in terms of capital allocation. Would you similarly look to expand that business outside of maybe university or outside of Wexford?

Good question. Well, right now, as I said, we've got this big path in front of us with great opportunities to allocate capital in a very value creating way and we are really focused there. I also said that we will continue to be nimble and opportunistic as we continue to grow cash flows in a reliable way and so we'll remain open to other opportunities. Our focus is on the investment opportunities with Wexford in the university-based business that are staring us right in the face with their very robust pipeline and so that's really what we're focused on.

Yes, that's helpful. I was going to toss my hat in the ring for the Todd Lillibridge seat like John Kim, but I don't have the good head of hair, so it probably kicks me out. So -- but seriously, congrats there on sort of the stewardship of capital and then that investment. Todd's leaving, so it begs the question to me, obviously, you've made a lot of money there. Would you look to monetize a portion there? Or is that still an area of focus for investment?

Well, we have a great MOB business. I think its value is perhaps underappreciated by investors and that's one reason we really wanted to highlight it. We're happy that we invested at the early stage of value creation and really built this business 7x from 2010, but we continue to look for opportunities to grow but also to prune the portfolio as we think is appropriate and so that's where we stand.

Okay, that's fair. Bob, can I just ask you. On the occupancy on the SHOP portfolio, you're down 200 basis points year-over-year. I know you affirmed the same-store expectation, but do you think that, that gap could widen further into the back half of the year? Or does that seem unlikely at this point?

Yes. We -- in the low end of the range, what's implied in that, Jordan, is that we could see a widening of that year-over-year gap sequentially. Conversely at the high end, we could see an improvement, and it's really again a function of the timing and pacing of new deliveries. That's what dictates the range in the back half.

And our next question comes from Chad Vanacore from Stifel.

This is Seth Canetto on for Chad. My first question on the SHOP portfolio, centers around expenses. They're up sequentially, I think last quarter was a little artificially low based on number of days, but just focusing on expenses and given your portfolio in high coastal markets, top MSAs, are you guys seeing a slowdown in wage pressure at all?

We started the year saying 4% to 5% wage growth, and that's been pretty consistent in the first half of the year. In the quarter, we posted overall expense growth of 3%. So by definition, the operators are doing a really good job of not only flexing that labor relative to occupancy, but also driving indirect costs down and are very much focused on that, but the 4% to 5% wage at the constant volume, I would describe it, consistent volume, wage growth has been pretty consistent.

All right. And just on flexing the labor, I mean if the year-over-year occupancy deteriorates further, which I guess is kind of dependent on the deliveries online, but is the flexing something that they can keep doing as long as occupancy is declining to help offset that? Is that how we should be thinking about that?

While there certainly is a point where fixed cost kicks in, I don't think we're there. I think there is certainly plenty of headroom and again, this is a very market-by-market-centric conversation. But I think there's still continued room to be able to flex labor, for sure.

All right. And then just shifting gears to the LTAC business. Coverage declined as expected and I think it's safe to assume that it should stabilize towards the end of '17 and into the beginning of '18, when you guys report the numbers. So I guess what gives you confidence that Kindred will be able to mitigate that business and improve the coverage there?

Great question. Kindred commented on the business in its first quarter call, and I think that you've got it exactly right about the pattern that in the early quarters, you would expect unmitigated impact to be larger and then as Kindred's mitigation strategies take hold, that impact will be lessened and improved considerably and that will take place in the back half and then into '18. I mean, the bottom line is Kindred is the best LTAC operator ever. I mean, this is their historic business. I think they are showing good opportunities to increase their compliant patient population, improve and take some site-neutral patients to control expenses and to improve mix in terms of Medicare Advantage and other favorable asset types because, of course, as you know, now you can have shorter lengths of stay with those patients and I think Kindred feels good about the fact that Medicare Advantage and managed care payers believe that there's a good value proposition that Kindred could provide on a shorter length of stay basis than the historical norm. So that's what gives us confidence in Kindred's ability to operate this portfolio and manage through the patient criteria changes successfully.

And our next question comes from Tayo Okusanya from Jefferies.

Just a quick one from me. The same-store NOI, the occupancy for the SHOP portfolio, I know you kind of talked about it kind of being dragged down a little bit by flu season and things like that. Could you talk specifically about how you expect it to come back a little bit in the back half of the year? Is it really just slowdown in deliveries? What else do you kind of expect to kind of go on to kind of close that gap?

You hit the key one, which is slowdown in deliveries and the ability for lease up and absorption to happen and one of the things I want to make sure everyone notes is the fact that the demand growth is strong, absorption was 3% year-on-year as per the NIC data, which is really encouraging, but obviously, a lot of units in lease up. So we need to have some time for that absorption to happen. Now seasonality, typically, one would see a pickup in the back half, but it really comes down again to this question of pacing the new deliveries.

Got you. Okay. Anything from -- I mean I know some of the operators had like bans on admissions because of the flu and things like that. Is all that kind of stuff coming off?

That's really a first quarter phenomenon, Tayo, and we're back in the normal season, I'd say. So nothing unusual like that that's occurring now. It's really about the summer season and gaining market share and operating with excellence in the context of supply, demand.

Got you, that's helpful. Then another quick one on the MOB side. Again, it sounds like there are a couple more large portfolio transactions in the market that could kind of go at mid-4% cap rates. Again, just -- while that's all great for NAV -- how does one really kind of think about a world of buying MOBs at -- high-quality MOBs at the mid-4%, like is that really sustainable longer term? Do you guys kind of expect some of that stuff to kind of turnaround in the near term? You're kind of wary of making acquisitions. Like how do we really kind of think about that world, just kind of given the typical 2% to 3% same-store NOI growth profile of MOBs?

Well, great question and I think that the way we think about it is our value-creation opportunity is generally to invest early in asset types where we think there will be cap rate compression and/or cash flow growth and we evidence that example, I would say, in the MOB business and in senior housing and we have been consistent at Ventas in our ability to see those trends, invest early and create value for investors through cash flow growth in the assets and/or cap rate compression. So what I would say is we have this really great business with a diversified portfolio. And one of the ways that we've been able to deliver reliable growing cash flows over cycles for almost 20 years is this underappreciated ability to allocate capital around the wheel, as I call it, where we can and have been able to consistently find good risk-adjusted return investments so that if one asset class happens to be exceedingly valuable, we have lots of other places to go to find good investments that deliver good risk-adjusted return and meet our investment criteria. And that has been, I think, an underappreciated, but very important part of our long-term success. And so that's how we think about it. We have a great business. We have 5 verticals. We have a great investment team and expertise and relationships and we will use those for the benefit of our shareholders so -- to make progress.

All right. So with that, I think we will end today's call. I'm just shocked and disappointed that no one congratulated me on winning the Stanley Cup, but it's a been a great summer so far. I'm really, really pleased with where Ventas is and our performance, and we hope everyone has a great summer, and we look forward to seeing you soon. Thank you so much for your interest in the company and your attention this morning.

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