芬塔 (VTR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Ventas Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Ryan Shannon, Investor Relations. Please go ahead.

Thanks, Krystle. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the year-end quarter ended December 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. The company cautions that these forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes and expectations. Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10-K for the year ended December 31, 2016, and the company's other SEC filings.

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

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

Thank you, Ryan, and good morning to all of our shareholders and other participants, and welcome to the Ventas Year-End 2017 Earnings Call. I'm delighted to be joined on today's call by our outstanding team as we discuss our excellent year, highlight our enterprise strength and value and provide the framework for our 2018 expectations.

The Ventas Advantage has allowed us to deliver sustained excellence through cycles for 2 decades. This success has been founded on solid strategic vision, foresight and innovation, proactive capital allocation decisions, rigorous execution and a stable expert team. As we enter 2018, which is Ventas' 20th year anniversary, we are confident we will continue our long track record of excellence as the leader in our space.

Let's start by quickly recapping 2017, which was a record year for Ventas, setting new highs for net income and revenue, generating 5% operating cash flow and dividend growth and delivering normalized FFO and same-store property cash NOI growth at the high end of our expectations.

To enhance our diverse portfolio, we made nearly $2 billion in value-creating investments, including significant expansion of our exciting university-based life science business, profitably disposed of almost $1 billion in assets and completed several innovative deals with our leading operating partners. We made significant progress on our commitment to environmental, social and governance matters and received numerous prestigious recognitions for our outstanding ESG profile. Our team stayed strong, smart and unified as we executed our business plan with great success.

As we look to 2018 and beyond, we are laser-focused on finding ways to deliver value for investors. We've anticipated and are prepared for today's market and business conditions. Every environment and cycle provides opportunities for those like Ventas who are experienced, strong and nimble enough to take advantage of them. That's what the Ventas team has done for the past 20 years.

With that as a backdrop, we expect to grow our total same-store portfolio cash NOI 1.5% to 2% in 2018. Our expectations are benefiting from our portfolio diversification and mix with nearly 2/3 of the business in our office and triple-net lease segments. While our SHOP portfolio is currently working its way through a timing mismatch of supply and demand, exacerbated by this year's severe flu season, we know that demographic demand from seniors will increase significantly, which should benefit performance in the SHOP portfolio in the coming years.

Our enterprise is expected to generate approximately $3.5 billion in consolidated revenues and $2 billion in consolidated net operating income in 2018. We expect our normalized FFO per share to range between $3.95 and $4.05 per share. During the year, we again intend to demonstrate capital allocation success by generating $1.5 billion as we harvest profits from the successful investments we've made. These include receipt of full repayment on nearly $850 million of 9-plus percent well-secured, well-structured loans in life sciences and hospitals; completion of a joint venture with an institutional capital partner on the valuable senior housing portfolio; and the sale of other assets.

We intend to recycle these proceeds and process into our future growth by ramping up to over $400 million, our funding of premier development and redevelopment projects, principally trophy life science and MOB assets, and by retiring outstanding debt in a rising rate environment. While these capital allocation decisions do have an effect on our year-over-year FFO expectations, they are the right steps in the current environment to realize gains from successful capital allocation, diversify our capital sources, improve our financial strength and flexibility and create further dry powder while the market adjust to the changing rate environment.

We also continue to pursue and evaluate opportunistic investments across our verticals. We remain focused on allocating capital wisely where we find attractive risk-adjusted returns, see a significant competitive advantage or strategic upside, or can help a customer achieve its goals. We've averaged over $2.5 billion in annual investment volume since 2012 but haven't built any material acquisition activity into our projections for 2018, consistent with our long-standing historical practice. If we see investment opportunities that are attractive and high quality, we have the capacity and the ability to execute on them.

Our 2017 and early 2018 activities highlight the benefit of our partnerships through its leading platforms and the value of our properties. Due to the strength of these platforms, the quality of the portfolio and strong forward demographic demand, institutional equity interest in Ventas' assets and operators is exceedingly high. Here are some recent proof points. Atria recently received a major equity investment in its operating business from Fremont Capital. This recapitalization demonstrated Atria's increased value since our original investments and validated Atria's leading market position as an outstanding senior housing care provider in a highly fragmented market.

Second, Kindred recently agreed to be acquired by 2 experienced health care investors who are putting significant new equity capital behind the Kindred management team and the LTAC, IRF and rehab business. With recent positive reimbursement news and continued operational strategies taking hold, our LTAC should generate improving results in 2018. We know how long and hard our friends at Kindred work to achieve its positive outcomes for Kindred shareholders, and we look forward to continuing to partner with them.

Third, we see significant institutional interest by global capital sources in the creation of a joint venture for our portfolio of over 70 senior housing communities.

We recently transitioned to a newly formed manager, ESL. We were pleased to successfully complete the transition of these communities and our strategic investment in ESL last month. We are confident ESL will capture operational upside and additional value from this portfolio. ESL has already become a sought-after manager in senior housing, and we are delighted to back industry veteran, Kai Hsiao, and an experienced team of executives in this highly strategic new management company.

Ardent continues to thrive and perform exceptionally well through year-end. With its pending acquisition of East Texas Medical Center in partnership with the University of Texas System, Ardent is expected to generate over $4 billion in revenue from its operation of 31 hospitals in 7 states with 40% average market share.

And finally, our leading life science platform, Wexford, remains a source of significant growth and value creation. In 2017, we invested nearly $400 million in development commitments and acquisitions, including projects anchored by or affiliated with Brown University, Virginia Commonwealth, U Penn and Wash U. This exciting business lines with top-tier highly rated research institutions and companies have grown nearly 40% since inception. And we continue to see growth opportunities at attractive risk-adjusted returns as we invest to meet the needs of premier research institutions and companies. We are also very pleased to see that Congress has significantly increased NIH funding over the next 2 years.

A word on our dividend and tax policy before I close. The recent tax cuts as we all know provided significant rate reductions to 21% for U.S. corporations. In addition, owners of pass-through businesses, including real estate companies, received an effective rate reduction to just under 30% at the highest marginal rate. That rate also applies to REIT dividends. We were pleased that our board recently increased our dividend 2% because our growing reliable dividend is an important component of the total value proposition we offer our shareholders.

To provide our shareholders with the benefit of the new rate, our fourth quarter 2017 dividend will be taxable in 2018 under the new improved rate. Our dividend increase further demonstrates our confidence in our business and our cash flow.

And that's a good segue to my conclusion. In short, we remain bullish on our business and our company. With near-term burgeoning demographic demand, a large fragmented industry, a proven consistent strategy, a strong balance sheet, excellent operating partners, a growing development pipeline of trophy assets that will become additive to earnings in the future, a cohesive experienced team and a track record of superior performance through cycles, the Ventas team is ready for another 20 years of success.

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

Thanks, Debbie. I'm happy to report another strong year of cash flow performance from our high-quality portfolio of health care, seniors housing and office properties. Our total property portfolio delivered same-store cash NOI growth of 2.5% for the full year 2017, at the high end of our 2% to 2.5% total company same-store guidance. All segments contributed to this growth and each delivered at the midpoint to the high end of our original same-store guidance ranges.

In 2018, we expect our total property portfolio to generate continued positive same-store NOI growth in the range of 0.5% to 2%, benefiting from the diversification of asset class, operator, geography and business model.

Let me detail our 2017 performance and 2018 guidance for our properties at a segment level, starting with our triple-net business.

Our triple-net portfolio grew same-store cash NOI by an excellent 3.7% for the full year 2017. In the fourth quarter, triple-net same-store cash NOI increased an outstanding 4.2%. Trailing 12-month EBITDARM cash flow coverage in our overall stabilized triple-net lease portfolio for the third quarter of 2017, the latest available information, was consistent with prior quarter at 1.6x. Coverage in our triple-net same-store seniors housing portfolio was 1.2x, down from 1.3x last quarter as a result of escalator growth outpacing underlying asset level cash flows. Cash flow coverage in our same-store IRF and LTAC portfolio held stable at 1.6x despite rent increases and the impact of the LTAC reimbursement change.

Finally, Ardent performed exceptionally well throughout 2017. The third quarter 2017 results were strong compared to leading publicly traded hospital systems in the U.S. with admissions, adjusted admissions, revenue and EBITDA growth leading the pack. As a result, Ardent rent coverage held strong at 3x. For 2018, we expect our triple-net portfolio overall will grow from 3% to 4%, driven by in-place lease escalations.

Moving on to our senior housing operating portfolio. Our SHOP results for the full year and for the fourth quarter were right in line with our expectations. Indeed, our initial SHOP guidance provided in February 2017 proved to be highly accurate throughout the year and top to bottom through the P&L. Full year same-store occupancy in 2017 declined by 180 basis points versus 2016, driven by the cumulative impact of new deliveries in select markets. REVPOR growth for the year approached 4% and fueled the bottom line. Operating expenses were held to a 2% increase despite labor wage growth of 4%. For the full year, same-store cash NOI increased by 1.3%, above the midpoint of our original guidance.

The occupancy gap versus prior year narrowed to 180 basis points in the fourth quarter, though new deliveries continue to pressure revenue. Q4 expenses were held under 2% through continued management of direct and indirect costs. At the bottom line, Q4 same-store SHOP cash NOI declined modestly, in line with our expectations.

We continue to see strength in high barrier markets, including Los Angeles, San Francisco, Boston and Ontario. Despite the strength, we observed mid- to high-single-digits NOI declines in markets affected by new competition, most notably within secondary markets.

Turning to 2018. We expect full year same-store SHOP cash NOI to be lower in the range of 1% to 4%. SHOP same-store cash NOI is expected to decline in 2018 due to the full year occupancy impact of a severe flu season as well as the cumulative impact of new supply in certain markets.

Let me expand on each of these drivers. First, flu. This flu season is the most severe in 8 years in terms of duration and reach across most markets of the United States. Flu related to hospitalizations are up nearly 70% among seniors aged 65 years or older. Those supportive of hospital and MOB volumes, flu negatively pressured senior housing occupancy in 2 ways: Through accelerated resident move-outs as well as limited move-ins to the community quarantines. The second driver of 2018 SHOP guidance is the cumulative impact of new supply. The elevated levels of new deliveries we observed in 2017 are expected to further accelerate in 2018 with new openings approximating 3% of inventory in our trade areas.

On a positive note, new starts in Q4 '17 were down nearly 20% in our trade areas. However, delayed new deliveries increased overall construction inventory by 30 basis points on a restated basis to 6.2%. In light of these 2 drivers, we expect that same-store occupancy in 2018 will decline in the range of 200 basis points versus 2017.

In terms of rate, we continue to see opportunity to drive in-place rent increases for existing residents. The majority of the 2018 rate letters have now gone out and averaged 4% across the portfolio overall and thus far are holding up well. Price competition on new resident rates are expected to dampen overall REVPOR growth for the year to approximate 3%.

From an expense perspective, a tight labor market and competition for staff is expected to drive wage pressure in the 4% range, partially offset by flexing staff and managing nonlabor costs. Therefore, we expect same-store cash NOI to range from minus 1% to minus 4%. The range is a function of the timing and occupancy impact of new deliveries and the resulting price competition in the supply challenged markets.

Although the current supply-demand mismatch is compressing near-term profitability, we continue to believe in the long-term opportunity in seniors housing and in our excellent market position with our high-quality real estate operated by a select group of the nation's leading care providers.

Let's round out the portfolio review with our office reporting segment, which represents approximately 25% of Ventas' NOI.

For the full year 2017, office same-store cash NOI increased by 2%, at the high end of our guidance. Q4 was the first quarter in which our office same-store pool included both our life science and our medical office portfolios. Our life science portfolio performed incredibly well in the fourth quarter, growing same-store cash NOI by 5.6% as new leasing in our Wake Forest assets drove life science occupancy 330 basis points higher to an outstanding 97.4%.

Our newly acquired and developed assets also performed well through the fourth quarter. Our South Street Landing asset is now 100% occupied by Brown University and the state of Rhode Island's nursing education center.

We also broke ground on 3 exciting development projects during the year, including our 3675 Market development at Penn, a follow-on development in Providence affiliated with Brown and Johnson & Johnson and a follow-on development at Washington University in St. Louis.

In 2018, we expect attractive same-store life science portfolio cash NOI growth in the range of 3% to 4%. The benefit of our ongoing development pipeline will begin to benefit the same-store pool starting in 2019.

Turning to our highly valuable medical office business. MOB same-store cash NOI for the full year 2017 increased by 2%, at the high end of guidance. Our team did an excellent job managing occupancy despite 33% higher lease expirations in 2017. Tenant retention in 2017 rose to over 80%. Revenue also benefited from in-place lease escalations that exceeded 2%. In 2018, we expect 1.5% to 2% growth from our same-store medical office portfolio. Guidance assumes stable occupancy despite continued lease expirations at elevated levels, low single-digit rate growth and expense controls.

On a combined basis, our office portfolio of life science properties and MOB assets is expected to grow same-store cash NOI in the range of 1.75% to 2.75% for the full year 2018.

Now on to our overall company financial results. In 2017, we delivered earnings growth at the high end of our guidance range, completed more than $1.8 billion of investments and $900 million of profitable dispositions with gains exceeding $700 million, made significant progress in enhancing our financial strength, raised our dividend and executed our strategic initiatives.

Normalized FFO grew 1% to $4.16 per fully diluted share, at the high end of our $4.13 to $4.16 guidance range. Our same-store cash NOI for the portfolio grew 2.5%, also at the high end of our guidance. We bolstered our liquidity by $1.4 billion through increased revolving credit facilities. Our balance sheet is in good health with net debt-to-EBITDA of 5.7x; fixed charge coverage, an exceptional 4.6x; and net debt to gross asset value of 38%.

Meanwhile, cash flow from operations grew 5% in 2017, and the company's Board of Directors declared a dividend for the first quarter 2018 of $0.79 per share, representing a 2% year-over-year increase.

On to the full year 2018 guidance for the company. The key components of our guidance are as follows: Income from continuing operations is estimated to range between $1.34 and $1.40 per fully diluted share. Normalized FFO per fully diluted share is forecast to range from $3.95 to $4.05. We expect our portfolio will grow same-store cash NOI by 0.5% to 2%, with same-store NOI growth at the midpoint as measured on a GAAP basis roughly 100 basis points lower than cash NOI. Finally, debt reduction is expected to further improve the company's net debt to adjusted pro forma EBITDA ratio to approximately 5.5x by year-end 2018.

Substantially all of the changing year-over-year normalized FFO is explained by 3 drivers. First, despite our track record of accretive new acquisitions, our guidance assumes no material unannounced acquisitions in 2018 as is our normal practice entering the year. Second, the impact of nearly $1 billion in late 2017 dispositions, together with a further $1.5 billion of new 2018 dispositions with proceeds earmarked for debt reduction, drives approximately $0.10 of 2018 FFO reduction. Though dilutive to FFO, this capital recycling activity reflects Ventas' capital allocation excellence, namely we sold $700 million of SNF assets in late 2017 at a highly attractive 7% cash yield. We expect nearly $850 million in repayments in 2018 on loans extended by Ventas that created significant value for our shareholders, most notably an expected early prepayment of the $700 million 9% loaned to Ardent that funded this successful LHP acquisition. The disposition guidance also assumes the sale in 2018 of a share of the senior housing assets transition to ESL, creating a new strategic operating platform and attracting a new institutional capital partner.

The third driver of FFO change year-over-year arises from aggressively managing our balance sheet. In addition to debt reduction from disposition proceeds, we expect to proactively refinance debt in 2018 with longer duration fixed rate debt to both extend our maturity profile and reduce refinancing risk. Together with LIBOR increases, these refinancing actions are expected to reduce FFO per share by $0.07.

Moving on to other important elements of our 2018 guidance. We expect to accelerate our investment in future growth via approximately $425 million in development and redevelopment funding, notably in new ground-up development associated with Penn, Wash U and Brown. 2018 guidance includes fees and payments from tenants, generating an incremental $0.04 of positive FFO in 2018, most notably arising from the announced Kindred sale to TPG, Welsh, Carson and Humana. No equity issuance is included in guidance. And therefore, the 2018 outlook assumes approximately 360 million weighted average fully diluted shares.

To close, the Ventas team is pleased with our performance in 2017 and strongly committed to sustaining our long track record of excellence in 2018 and beyond.

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

(Operator Instructions) Our first question comes from Tayo Okusanya from Jefferies.

So a couple of questions from my end. The SHOP portfolio -- I understand what you're saying about supply having an impact on things of that nature, but could you talk a little bit about, is part of it also more difficult year-over-year comps from Canada that did really well last year that's slowing this year? And I guess, we just -- some of us are just a little bit surprised about the big magnitude of the decline in '18 versus '17.

Thanks, Tayo. I'm going to turn that to Bob for answer.

Sure, Tayo. Within the guidance, it's very clear what the 2 drivers are year-over-year. It's flu and supply, as outlined. If you look at a market level, clearly, that's most pronounced, particularly the supply in the U.S. We expect Canada will continue to perform well in '18, really driven by rates given the high occupancy. But this has really been a movie that's been unfolding over the last year. We've been very consistent and accurate on the forecast. You saw that softening in the fourth quarter on the heels of the new supply, so it's really continuing that trend line.

Okay. That's helpful. And then secondly, in regards to your guidance versus The Street, I think one of the things some of us may have had difficulty modeling was just the Elmcroft transaction and the whole transition more towards you being a minority owner in a JV versus having full ownership. Could you just give us a little bit more detail around, again, the overall size of the transaction, maybe some pricing data? Anything that could just kind of help us model that a little bit better versus the limited data we had going into the quarter?

Tayo, this is Debbie. And congratulations on your forecasting. You get a prize for that. The -- what I would say about the transaction is we're very happy that we have successfully completed the transition of the assets and our investment in the operating business at ESL, and we did that in January successfully. We've kind of separated -- you have to think about the impacts in a couple of buckets. And I think on the NOI side, for the period of time that we own it, obviously, we'll have 100% of the NOI from the assets, and we expect that NOI to have operational upside over time. So we're excited about that. And then we've treated the joint venture essentially as -- in the disposition bucket. When we talk about the $1.5 billion of expected dispositions, that would be the pro rata share of what we would be potentially partnering with a global institutional capital source on and receiving proceeds from that. And so we would expect that to be at an attractive valuation, obviously. And you should -- the amount and the valuation of the assets, while we expect to be positive, will be refined as we get closer to completion of that transaction, which we would expect sort of by midyear.

But just to clarify, that $1.5 billion you have in recycling -- in your 2018 numbers is excluding -- is all across the entire thing?

No, no. That's what I was saying is if you assume a valuation, pick a number, call it 1, then -- and if we were joint venturing such that an institutional capital partner was buying, say, 33% of the portfolio, then the disposition proceeds would include 0.33 of that. So that's how it's being counted. And hopefully, that provides clarity for modeling.

Got you. Okay. I think that's helpful...

And just to confirm that $1.5 billion has $850 million of loan repayments and then the balance is property asset dispositions, including ESL, as Debbie described.

Yes...

Got you. Okay, that's helpful. Okay. And the last one for me, if you don't mind, the $200 million in gain on sale that you had in 2017, what -- how -- does that come back to investor as some type of special dividend? Can you kind of reinvest those gains into acquisitions? Can you just kind of talk about that kind of excess liquidity that you generated?

Yes. I mean, we had 7 -- over 700 million of gains in 2017. And I would say we have been able to redeploy those proceeds into a combination of redevelopment and development projects, as we talked about, debt reduction. And of course, some of that does come to our shareholders by virtue of our dividend. So that's how those proceeds have been utilized.

Our next question comes from Michael Carroll from RBC Capital Markets.

Debbie, I just want to touch on your comments regarding the investment market today. What is Ventas' strategy? And are you likely to stay on the sidelines in the near term until market price has adjusted the higher interest rates that we've seen?

So again, in our experience kind of working through market changes like the one that we're currently going through. I would say that we are very confident in our ability to be good capital allocators that's, I think, been on the buy and the sell side demonstrated over the last couple of years. We continue to be active in seeking value-creating investments as and when we find them. And our priorities, clearly, are to continue to invest behind trophy development and redevelopment projects that will be additive to earnings in the coming years. And we continue to try to support our customers and find other opportunities that will create value for investors. So there may be, as we've seen in the past, a lag between the change in the public market environment and private market valuations. And we are ready to take advantage of opportunities when they arise.

Okay. And then just last question real quick. Can you provide some additional color on your growth plans with Ardent? And then what was the main issue trying to transition net debt position on the LHP portfolio to equity ownership position?

Yes. Well, we've always said that we thought that the LHP loan, that is the $700-plus million loan that we made to fund Ardent's acquisition of a high quality, hospital company, LHP. And again, we feel very, very good about all of the hospital investments that we have made.

And we said, when we made it that there are 2 good outcomes. One is that we would get paid back on the loan, which will make it an excellent investment and the other might be that it gets converted into an equity position. Right now, our expectation is that it would be repaid in 2018. And we think that's a very positive outcome. And again, over time, we really -- we believe in Ardent, and we know that they are operating high-quality assets. And over time, we hope to convert some of that into equity ownership. So we're in a perfectly hedged position, and we are supporting their growth and I think making good investments.

And our next question comes from Smedes Rose from Citigroup.

I just wanted to ask you, you noted that the net lease on senior housing -- net lease coverage came down to about 1.2x for the third quarter. And given the fundamentals continuing to be challenging in that space, how are you -- are you confident that the portfolio doesn't decline to under 1x coverage? And is it too soon to talk about potential rent reductions? Or just kind of how you're thinking about that coverage going forward?

Smedes, over time, again, when you have triple-net lease assets, you would expect EBITDARM to vary as rent increases and you go through operating cycles on the assets. As we sit here today, we're comfortable with the performance, which again is expected as we've talked about before. And our current expectations are that we'll continue to have all of our material rent paid in 2018 and feel good about that.

Okay. And then I just wanted to ask you, too. It just looks like the percent of MOB leases rolling into 2018 went up a little bit sequentially from what you had shown in the third quarter. And I'm just wondering what was driving that?

You are correct, Smedes. It is up. You'll recall '17 was already at elevated levels. '18, we're seeing more of the same. And we've added some assets in that pool, so the pools are changing. But at the end of the day, the team has done a great job in retaining tenants. I mentioned we had over 80% tenant retention, and that's great. And we hope to have the same going into '18, but these 2 years in particular have been at elevated levels.

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

Just on the RIDEA guidance. I was hoping you could talk to, just as a whole, what you're expecting for expense growth. You talked a little bit about the labor side of the equation. And while I got you on the guidance question, any color on G&A?

Total OpEx, which you know 60% of that is really labor driven, we're estimating 4% labor increases, very much in line with what we saw in '17, which itself, of course, reflected some of the pressure we see of a tight labor market. We expect to see some offset with nonlabor expenses, managing those down and also, again, flexing labor in '18, albeit there is some moderation of that as we think about the occupancy level vis-à-vis flexing labor in '18. And so though there's an offset, it's not a full offset, and that's inherent in the guidance.

And G&A, sorry?

In total OpEx, the total OpEx line.

He's asking G&A?

G&A for?

The corporate.

For Ventas?

Ventas?

Yes, sir. Yes, ma'am.

Oh, okay. All right. I thought you were asking about -- look, we've always been very lean and efficient, and there's no change there. We have some modest increases in costs, just really driven by compensation, inflation, et cetera. But no significant headcount changes, no significant moves, very much controlled as always.

Okay. And then just going back to Smedes' question on the triple-net coverage. So with the decline quarter-over-quarter, you're around 1x EBITDAR. We've got big exposures to holiday and Brookdale -- holidays had a tough go Brookdale as well. You've got some expirations coming in '19. Could you give us any sense of kind of what the game plan is and just wanted to reiterate that there's no assumed rent cut in the '18 guidance?

Yes. Happy to confirm that last statement that as we sit here today, we're comfortable with where things stand and have assumed contractual rent payments through 2018. And clearly, we're in a part of the cycle where our operating results are feeling a little bit of the heat. I would say that we've been in lease renewal situations many times before, as you've seen with Kindred and other operators. And we would continue to handle those, obviously, in the best possible way. And I think you can count on us for that.

Okay, great. And just one more question. The $0.04 you alluded to is fees. Is that being included in the same-store triple-net guidance for '18?

No.

No, it's not, Juan. It's not associated with the lease.

Our next question comes from Nick Yulico from UBS.

Bob, for the senior housing operating segment, can you talk a little bit about how much the flu impact hit same-store NOI growth? I assume it's to some level on occupancy, but maybe it's a tough question to ask -- answer. But just trying to get a feel for what -- if we didn't have a bad flu season, what would be the occupancy assumption?

It's a really good question, Nick, and very hard to quantify despite many people trying to do so. It clearly does affect the occupancy. We talked about accelerated move-outs and difficulty in move-ins just because you can't sell, and that's the net occupancy impact. A number I can share with you is we do track each of those, particularly track how many days are closed for selling to new potential residents year-on-year, and that number has gone up by 250% year-on-year in terms of days closed for selling. Ultimately, what that translates to in terms of occupancy, hard to say. But as we've seen flu in the past, what does not appear to happen is it's not a timing issue, it doesn't rebound. You lower your occupancy level, and that kind of carries forward throughout the year. So hard to put a number on it, but clearly an impact.

Okay, that's helpful. And then just going to the same-store guidance, you cited in the release how your GAAP same-store NOI growth is 100 basis points lower than cash, mostly in the -- due to the office segment. And so I'm just wondering what that is. Is that just a lot of free rent burning off? It seems like a big difference if office is 25% of the same-store pool.

We've talked about this before, Nick. And given that 100 basis points as a rule of thumb and most notably straight line being the big difference, where we straight-line rents, products, you don't see that escalation, which we do in the cash number. What's notable here and we want to highlight is the life science business, which is now an important part of the overall same-store, has significant straight-lining in it. So that really is what -- is the new news, if you like. But that 100 basis point differential has been fairly consistent.

Okay. Just one last one for me. Going back to -- you cite the 5.5x debt-to-EBITDA target by year-end, and you have a lot of dispositions and a lot of debt payoff assumed. But when we look at it, it looks like you still have some capacity to do acquisitions and hit your 5.5x debt-to-EBITDA target. So can you maybe just walk us through the leverage math and let us know if there actually is any buying capacity that you have for acquisitions, which are not assumed in guidance, and where you could still get to that 5.5x debt-to-EBITDA?

Well, certainly, in the 5.5x reflects the assumptions we've given you. And obviously, the ratio depends on both the EBITDA and the indebtedness, and that combination gives us 5.5x. Clearly, there is opportunity for investments. Though we're at 5.7x year-end 2017, we've always been very comfortable in 5 to 6x. And therefore, the ability to use the balance sheet to go after acquisition or investment opportunities is clearly there. And the dry powder and financial flexibility for us to do so is an important reason why we're using the proceeds to delever. But the math tells you it's 5.5x, as assumed.

Yes. And make sure that you're accounting, obviously, the funding of these trophy development projects that we're working on that do provide the EBITDA in the later years but not in the current ones, while they do use capital in the current environment.

Our next question comes from Rich Anderson from Mizuho Securities.

So if I could just get back to Brookdale for a moment. And I think trusting you to handle it, and you have a good track record in handling difficult situations. I'm curious, when you have $650 million of asset sales inclusive of the joint venture, so some subset of that, plus 2019 expirations in your triple-net portfolio coming, to what degree is the 2018 plan on Brookdale asset sale's addressing leases early that are coming due in '19, a combination of both? Do you have a leaning towards one way or the other to address the Brookdale situation?

Well, thanks for the question and the confidence. Again, I think we're very comfortable with where we are right now. We have good assets. We have good agreements. We have good experience to come up with optimal outcomes for Ventas' shareholders and our tenants and operating partners. And we continue to use that toolkit really with everyone to make sure that we're coming up with these optimal outcomes that can create positive results for the tenants and also protect and advance the interest of Ventas' shareholders.

So -- but doing it before '19 probably makes sense. Is that a fair statement?

Well, it's an art, not a science. And so that's part -- that's the experience part where really there are optimal ways and times to take actions. And our job is to advance and protect the interest of the shareholders while, obviously, we have an interest in Brookdale's continued success as well. So we're on it.

Fair enough. Okay. I got you. Okay. And the last question is you're paying down debt strategy is reminiscent of pre-Great Recession time period when you were pretty early to kind of hunker down on your balance sheet. I also think or we also think that this sector needs some price discovery to maybe create some type of catalyst, maybe you get that with your ESL joint venture, to some degree, but perhaps some other combinations. To what degree are you kind of reinforcing your balance sheet with an eye towards some of the major dislocation of stock price performance in your group today? Do you think -- maybe not you, but do you think M&A in some form or fashion is a necessary component to the ultimate long-term success of the health care REITs?

Wow, that's a big question, and I'm going to take on a part of it. But yes, you're right about price discovery. I think that we have said and have proven out in many respects the very keen institutional interest in our asset types and our operators. And in part, again, that is because of the demographic demand in the business. But we are in this changing price environment that relates to a whole host of factors, including changing rate environment.

So we are pleased with kind of how we've positioned the company so far. We like the idea that we have $1.5 billion coming in the door expected in [2015] (sic) [2018] to enhance that dry powder and financial strength and flexibility. And what I want to share is that we would intend to use those resources in the best way we can to create value for our shareholders. And it's probably too early to say what those best moves are, but the key thing is to be in the position to have a lot of options and a lot of firepower. And that's where we are, and that's what we're happy about.

Our next question comes from Michael Knott from Green Street Advisors.

Just one question. As you think about the construction of the portfolio, when you compare and contrast the SHOP guidance for '18 versus the continued stability and strength of the triple-net portfolio, does it make you at all rethink what's the right size of the SHOP portfolio within the overall Ventas asset base?

Great. Great question. I mean, we have always prided ourselves on being extremely disciplined about portfolio diversification, which we look at in terms of asset type, business model and operator, among other things. And I think we have kept to that discipline. And investors, I think, sometimes want us to go more full one way or another. But we think our portfolio construction has been very deliberate, and I think our mix is actually quite good.

Obviously, we are out of the skilled nursing business, which is, I would argue, the most significantly challenged asset class in our business. We think that senior housing, as I've said -- we have a high-quality SHOP portfolio that's about 29% of our NOI, and that is a good percentage, I would say, as you get benefits. But you clearly go through some cyclicality as we work our way through this supply-demand timing mismatch. And then you have the great office in triple-net portfolio that's about 2/3 of the company right now, and that office portfolio is growing. And it's a low -- lower kind of wage-type business.

And at the end of the day, this portfolio construction is really an important priority for us, and it has served our shareholders well over time. And we believe it's continuing to do so.

Okay. And then just on the -- your response to the question a second ago about having the optimal firepower to take advantage of future opportunities perhaps. Just wanted to ask about the 5.5x debt-to-EBITDA. Is that the right leverage level? Is that what you're thinking as sort of the lowest that you will get to? And then also that sounded like the recent moves in the equity market did sort of cause you to become a bit more conservative in the capital allocation philosophy and view of the balance sheet, if I understood what you said correctly, which doesn't sound that far-fetched given it seemed like you were pretty conservative in 2017 on the capital allocation front.

Good, right. I mean, I think you're reading it -- we have -- as I said, we have anticipated and prepared for current market and business conditions. We feel good about where we are. We continue to evaluate balance sheet and capital allocation and, again, portfolio diversification but follow the principles set, our long-standing ones that we've followed for a long time, which is basically 5 to 6x on the balance sheet and kind of strict rules around our portfolio mix. And so '18 is exactly as you say, a continuation of that. And I think the value of that approach is manifest.

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

Bob, you mentioned in your prepared remarks that you think the flu may have a 200 basis points impact to your SHOP occupancy this year along with new supply. Do you think this is emblematic of the industry? And do you think your triple-net tenants are also forecasting this steep of the decline?

Just to clarify, John, there are 2 key drivers in the guidance on occupancy. One is flu. The second is the supply impact. Those together are driving, we estimate, 200 basis points of occupancy decline year-on-year. So it's a cumulative impact as opposed to an individual impact within that.

Clearly, within the industry data, if you look at it, occupancy pressure is a truism throughout the industry. You see that in NIC, no difference. I think what is unique to our SHOP portfolio has been the pricing power and rate that we've been achieving, and that's what I said has been really fueling the bottom line. But occupancy seems to be in line with industry trends.

Your REVPOR declined a little bit sequentially. And I'm just wondering if your -- if the industry is more aggressive on buying occupancy and lowering rates, if you're going to file suit.

You're right to say we did see some erosion in REVPOR in the fourth quarter. And indeed, as we think about the guidance for '18, I mentioned REVPOR for the year overall was 4% roughly in '17. We're expecting 3% in '18 on REVPOR year-on-year growth. The driver of that is, I'll call it, the re-leasing spread. It is -- in select markets where there is new competition, there is pricing pressure. And that's what drives that differential.

And then the second question is in Todd Lillibridge. I think it's been a couple of quarters since you announced that he was transitioning from the MOB business. And I'm wondering if you have an update on a replacement?

Well, he's sitting here with a big smile, and that's a good question. So we continue our MOB CEO search and expect to be successful at it. And Todd is at the helm and performing all his duties. And we expect to have a successful transition of those duties in the course of the beginning of this year.

Do you think that person will have public MOB background?

Great question. I think we are looking at a wonderful slate of very attractive candidates with varied backgrounds. We have prioritized someone who is expert in the health care business and has all of Todd's other good qualities. And so we will be happy to share more as the search concludes.

Our next question comes from Jordan Sadler from KeyBanc.

So I just wanted to clarify on the Ardent repayment. You mentioned the East Texas Medical, would you have interest in participating there? Is there an opportunity for Ventas?

I'd love to talk about that. So when we acquired an interest in Ardent with EGI several years ago, clearly, teed it up as a really outstanding hospital operator, great assets, great market share and poised to be a consolidator. And that is definitely happening as we drew it up on the board. This recent opportunity for Ardent to acquire East Texas Medical Center with the University of Texas system. It's a really exciting one and highlights Ardent's ability to be a consolidator.

I would say that, over time, we certainly may have an opportunity to partner on the real estate. The current plan is to acquire the assets and integrate them, and we're very supportive of that. Ardent will be double -- more than double the size of when we first started and very, very successful. And so we're well positioned over time to, as we talked about with the LHP assets, a recent acquisition in Topeka and then the East Texas Medical real estate, to become an owner thereof. It's a process, yes, particularly with the fact that many of these hospitals have very valuable academic medical center and not-for-profit system partnerships and relationships. And so that is wonderful for the performance of the assets. It's wonderful for market share and pricing. And for Ardent, it is a process, though, over time as we saw with some of the assets we originally acquired to transition those into successful real estate ownership.

Okay. And then in terms of the -- your tenure at Ventas, you're going on 20 years, I don't mean to point that out, but you've had a pretty compelling run here. And I'm not asking you about planning for the future in a way in terms of your tenure. But I am curious, you've watched the tenure go from probably close to 6% when you started lows in the 1% range. And it seems as if the tenure has bottomed potentially. And I know the market has cried wolf a number of times here, but it looks like it's heading higher. I see you selling assets here. And I'm curious as you look maybe a few years out with the potential for higher rates, how should Ventas be positioned balance sheet and asset-wise? What makes the most sense to you right now?

Well, I think we're very well positioned right now. And what continually gets me excited about coming to work every day is the team that's here, the tremendous company that we've built. And while we have done so much over those 20 years, as you know, 20 years of 23%, 24% compound annual return, 20 years of growth from a couple of hundred million in equity cap, 20 years from 100% Kindred to 6% Kindred. What's exciting is there is so much more to do. Our sector, I believe, is still in the early stages of a private to public transition. I think that it is still under-owned in public hands. And we continue to see tremendous opportunities in this space and are excited about the demographic demand that we have in our space that isn't shared by many of the other real estate spaces and some of the very exciting opportunities that we see ahead.

Our next question comes from Chad Vanacore from Stifel.

So just thinking about the Ardent transaction, $850 million loan repayment. I didn't catch the timing on that. Is that sort of midyear? Or when are you expecting that?

Midyear is a good assumption, yes.

Okay. And then just on that, my back-of-the-envelope math would suggest that the transactions and dispositions that you laid out would get you probably down to leverage in the low 5s? But you're saying is the year-end, we should expect mid-5s. In that leverage assumption, are there acquisitions and recycling assets assumed in there?

No. Again, we are at 5.5x with those assumptions. A couple of things to note, the $1.5 billion is at an 8% blended yield on average, right, being used to pay down debt in the range of 4% or 4.5%. And we are also, at the same time, investing $425 million in development and redevelopment spending, which is not yielding immediate NOI, and that's future investment for future growth. The net of all of that is 5.5x.

Okay, got it. And then just thinking about the Brookdale portfolio. Could you give us an idea where coverage is today? And can we assume that operating results on that portfolio have similar trends to what you've laid out on your SHOP portfolio? And then if not, then what's different?

Okay. So as we've said in the past, in terms of our triple-net coverages, Brookdale is very consistent with the coverages that we have in the entire portfolio. And in terms of specific trends on that business, as we always are careful to do with our public operating partners, would encourage you to talk to them about their specific operating results. But within our portfolio, very consistent with the triple-net senior housing reported coverages.

All right. Then just one last one for me. When you're thinking about this JV in the Elmcroft/Eclipse portfolio. Can you give us an idea of why the strategic partnership with the new capital partner there?

Yes. I mean, we think there are a lot of strategic and financial benefits to doing it. We like to diversify our capital sources. We think it will be great to have a recognized global institutional partner there. And we are -- we believe there's upside in the portfolio that is valuable and that it's a great opportunity for us to continue to recycle capital and continue building out, for example, our trophy life science portfolio and ramp up the development pipeline and fund activities like that. So we think it's an excellent opportunity all the way around.

The next question comes from Paul Puryear from Raymond James.

This is actually Jonathan Hughes. So going back to the LHP Ardent loan, why are they prepaying? And how do they plan to fund that? It seems to me they wouldn't be able to get cheaper debt in the current environment relative to a year ago. So I'm just trying to understand why they're prepaying and where that money will come from?

So because Ardent has done well and because it acquired LHP, it acquired another asset and is on track, as we've mentioned, to acquire East Texas Medical Center, I think, in general, the idea would be to refinance a more streamlined capital structure for the entire company. And it really is a mark of the company's success that we believe that we'll be able to do so. And that's our expectation. And that they will use those proceeds to repay our loan, and we will redeploy the proceeds as discussed.

Okay, fair enough. And then one more. I know you put out a press release following that the Kindred news in December supporting the deal. But they put out a slide deck this month that doesn't suggest any slowdown in the headwinds facing the post-acute space. Do you see any risk from Kindred now being owned by a private equity in terms of them being more aggressive when looking at cost savings, potentially including rent payments?

Well, that's a really interesting one because, as I said, as we look across the landscape here, whether it's Ardent that's getting new equity funding from EGI to continue to expand or Atria who's getting equity capital, I would say Kindred is in the same situation. We think it's a real positive that experienced health care investors like TPG and Welsh, Carson are putting fresh equity and a significant amount of it into the LTAC and IRF and rehab business with Kindred, our leading operator. And there will be a substantially, frankly, delevered balance sheet in that situation. And as I mentioned, we think that the LTACs with -- particularly with this recent news out of Washington on the extenders bill, would, in fact, have positive operating trajectory in 2018. So we think the partnership with Kindred and the new private equity firms can create opportunities for us. We have done business with Welsh, Carson before, and we really look forward to continuing to work with them and hope there will be opportunities for us together to do more.

Our next question comes from Daniel Bernstein from Capital One.

Are there other opportunities to joint venture in, say, other asset classes besides seniors housing for you, such as medical office or life science? I haven't really heard you talk about that, but there seems like there should be opportunities there as well.

Absolutely. I'm glad that you pointed that out. Again, we have a valuable diversified portfolio. We have, with Todd, skilled MOB business; and in doing so, created billions of dollars of value as it's grown 7x since we first came together, obviously, a very attractive asset class to institutional capital. And we are doing the same thing with the university-based life science. That is investing early with the winning platform, putting capital behind it and creating value. And over time, it's a great option to have. And certainly, there's great interest in our high-quality office portfolio from institutional capital for possible joint ventures.

Okay. And then in regards to the derisking, deleveraging of the business, I think that's the right strategy at this point and commend you on that. At the same time, you're trading at about 10% discount to net asset value. What was there -- was there a thought process in terms of buybacks versus derisking? It almost implies that you think there's going to be very good opportunities going forward on the acquisition side at some point, if you don't buy back your stock at this point?

Great, another great question. Again, as we think about what we're doing is we are harvesting profits and proceeds from successful investments. Our immediate earmarking is for those proceeds to delever and improve financial strength, which gives us additional dry powder. And then as the environment clarifies, obviously, we believe that we will be really sound capital allocators in whether and how we would choose to use that dry powder. And there's many, many ways for us to do that, and you've cited some of them. And we would expect to allocate that dry powder, if at all, to value-creating investments, which can include a wide range of possibilities, including our own equity.

Okay, okay. I know it's very late in the call, but just one quick question on the timing of how you think about the occupancy loss and the minus 4 -- minus 1 to minus 4 NOI. Do you think that the operational business is going to get better in the second half of '18 versus 1 half? I know there's normal seasonality, but how are you thinking about the kind of the trough in seniors housing at this point?

Well, we appreciate the questions, and we want to make sure to give everyone their due time today. So I'm going to ask Bob to address that last one.

Dan, we would expect the quarters to look quite similar year-on-year. We don't see a wild variation. I mentioned the flu impact and how that tends to continue to kind of drop down occupancy and carry forward through the year. So that will, therefore, affect all of the quarters. But beyond that, I don't see anything that's driving any unique changes quarter-to-quarter beyond normal seasonality.

Our next question comes from Todd Stender from Wells Fargo.

Back to the Canadian discussion. It's a market -- it remains a bright spot for you guys in senior housing. But when you look at the price point of Canadian rents versus U.S. rents, even in your lowest bucket, is affordability part of the key? I mean, is that something that's going to support occupancy? And is there an opportunity here in the U.S. to play in that lower segment, something in the 3 -- maybe $3,500 a month range.

Yes. I'll comment on the Canadian pricing first, which is it's more of an IL market for us than the overall portfolio. So on a relative basis, it looks lower, but it's really based on that acuity. And we believe we have quite strong pricing power, by the way, in Canada. I mentioned that is what gives us confidence in 2018 and continue to grow the bottom line in Canada on that price. And we're at 90-plus percent occupancy there, so that gives us the opportunity to so do.

Okay. So I'm glad that you all joined in this morning and want to say how much we all sincerely appreciate your time, your interest in our call, in our comments and your interest and support of our company. So thank you so much. We look forward to seeing you soon.

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.