芬塔 (VTR) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Ventas Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ryan Shannon, Investor Relations. You may begin.

Thanks, Sara. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2018.

As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the 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, 2017, 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. Good morning to all of our shareholders and other participants. I want to welcome you to the Ventas First Quarter 2018 Earnings Call. I'm delighted to be joined today by our team to report on our excellent start to the year, highlight our continued progress in executing on our strategic priorities, update you on our mutually beneficial agreement with Brookdale announced today, and discuss our improved 2018 expectations.

Our strategic priority for the year included improving our triple-net lease maturity profile, investing in our future growth, appointing a new leader for our high-quality office business, establishing a new senior housing platform, improving our balance sheet and all the while delivering on our financial commitments. In classic Ventas fashion, I'm delighted to report significant progress against all of these objectives.

Let's start with results. We were pleased to grow normalized FFO per share by 2% to $1.05 this quarter. With our strong start to the year, our full year expectations for 2018 normalized FFO has increased to $3.99 to $4.07 per share. Our diversified portfolio also performed well with each segment contributing to 2.6% total same-store cash growth. We are really happy with the mix, quality, performance and resilience of our differentiated portfolio. We also enhanced our financial strength and flexibility during the quarter by extending and staggering our debt maturities and recycling capital to improve our net debt-to-EBITDA ratio to a strong 5.5x. We continue to invest in our future growth through development and redevelopment, focused on medical office buildings, institutional quality like science and innovation centers, and highly selective senior housing projects. We are seeing good momentum with our life science new development projects.

Our development at Washington University, which is scheduled to open in 2018, now has leasing commitments approaching 90%. Meanwhile, our 3675 Market development at Penn, also expected to open later this year, has commitments for approximately 70% of its available space. Finally, our asset at Duke University, which opened in summer 2017, is expected to be stabilized only 1 year after opening, as a large creditworthy tenant has expanded into most of the remaining available space.

Meanwhile, our trophy MOB development in downtown San Francisco, adjacent to the new $2 billion Sutter hospital building, has now reached approximately 80% pre-leasing, anchored by Sutter Health, a AA-rated health system. The grand opening of our Sutter MOB is expected by early next year.

Development and redevelopment of medical office and university-based life science and innovation centers remain our top capital allocation priority.

Turning to senior housing and the significant improvement in our triple-net lease maturity profile. I'm very pleased to tell you that we have reached a mutually beneficial deal with Brookdale, a long-standing tenant and the nation's largest senior living operator. We have good agreed to combine and extend all of our Brookdale assets into 1 guaranteed master lease, whose term runs for 8 more years through 12/31/25, when the senior population will be extremely robust. To give Brookdale support and stability while it executes this operational turnaround under its new team, we have provided an average of $6 million in annual rent credits to Brookdale in each of the remaining years of the lease, which provides even greater reliability for our future cash flows. We've also agreed on a straightforward objective change of control standard for Brookdale, balanced with significant credit and other enhancements for us if a change of control does occur. The agreement includes the ability to sell up to 15% of the Brookdale assets to improve portfolio quality, reduce lease assets at Brookdale and further diversify the Ventas portfolio.

So we continue to find innovative ways to optimize our portfolio, invest in significant operator relationships and advance the interest of Ventas shareholders. We support the efforts of Brookdale's new leadership team to drive operating performance in our portfolio and across the company and commend them for acting decisively to move Brookdale forward.

With the completion of our Brookdale agreement, we have less than $2 million per year of triple-net senior housing rents that matures through the end of 2020, and our total triple-net weighted average lease maturity is extended to 10 years.

Moving on to our newest winning platform, ESL, led by Kai Hsiao and his experienced team of senior living executives. Partnering with ESL has given us important strategic and operational flexibility in senior housing, because high-quality management teams are the scarcest asset in our business. We successfully transitioned the portfolio of 76 Ventas-owned senior living communities to ESL in January, and both ESL and the portfolio are off to a strong start. ESL has a fully staffed team and it has already become a sought-after manager in the senior living business. The portfolio has begun to show good signs of operational upside, including sequential improvement in occupancy. With the transition behind us, we believe we will derive good risk-adjusted return and growing cash flow from this portfolio.

As we come upon our 20th anniversary at Ventas, we are proud of our accomplishments and we remain driven for more. Despite the challenges in the REIT market today, we remain bullish on our industry, our enterprise and our future. As I look across the entire equity market, I can't think of where else you can invest in an S&P 500 stock, with a rock solid 6.5% dividend yield, BBB+ balance sheet, a compelling demand story, a dynamic, fragmented and large investable market, and an experienced excellent team, that has a long record of extraordinary value creation, innovation and results.

Before Bob begins his remarks, I want to officially welcome our new colleague, Pete Bulgarelli, to his first earnings call at Ventas. Pete joined the team in April as the leader of our highly valuable integrated 25 million square foot ambulatory MOB and university-based life science business. Pete has a long and exceptional record of accomplishment in real estate, most recently focused on healthcare, life sciences and higher education, including academic medical centers. We know Pete will bring high energy and great experience that will take our office business to the next level of success and performance.

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

Thanks, Debbie. I'm happy to report a strong start to the year from our high-quality portfolio of healthcare, seniors housing and office properties. Our total property portfolio delivered same-store cash NOI growth of 2.6% in the first quarter, ahead of our expectations with all segments contributing to growth.

Let me detail our first quarter performance and 2018 guidance for our segments, starting with SHOP. Our SHOP business came out of the gate strong, with cash NOI growth versus prior year of 0.7%, ahead of our full year expectations. As expected, first quarter same-store revenue grew nearly 1%. Occupancy exceeded our expectations at 87.4%. We're up 160 basis points below Q1 of 2017. A severe flu season did have an impact on move-in activity in the first quarter. This impact was mitigated by move-outs, which were better than both expectations and prior year levels. Lots of new competition opening its doors in the first quarter also supported occupancy, and continues the trend of delays in new openings.

Q1 REVPOR growth was 2.7%. Though inflation increases were strong, REVPOR growth was muted by price competition and supply challenged markets. Meanwhile, operating expenses grew in line with revenues in the first quarter at nearly 1%. Our operators did a terrific job managing staffing levels in the quarter, and expenses also benefited by 50 basis points from a favorable insurance true up in the quarter. At a market level, we continued to see NOI growth in our traditional strongholds, including Los Angeles, San Francisco, Boston and Ontario. This strength was mitigated by NOI declines in markets affected by new competition, most notably Atlanta, Dallas, Chicago and a number of secondary markets.

On a positive note, we continued to see fewer new construction starts in our trade areas, with a 50% sequential decline in Q1 starts versus the fourth quarter of 2017. In fact, the first quarter 2018 represents the lowest level of new construction starts in our markets since 2014. However, the recent trend of delayed new deliveries of construction already underway increased the construction to inventory percentage in our trade areas by 10 basis points. Despite the strong start to the year, at this stage, we are maintaining our full year same-store NOI guidance of minus 1% to minus 4%, although with an updated assumptions. Our guidance now assumes a full year occupancy GAAP below prior year in the range of 150 to 200 basis points. While REVPOR is now anticipated to grow between 2% and 3%. The full year NOI guidance range is a function of the pacing of new deliveries and resulting revenue impacts. ESL, our new seniors housing operating partner, is now reflected in our Q1 SHOP supplemental reporting. We are pleased to welcome Kai and the ESL team to our high-quality SHOP business. ESL has certainly hit the ground running, growing occupancy in the portfolio by over 100 basis points since transition.

Moving on to our triple-net segment. Our triple-net portfolio grew same-store cash NOI by an outstanding 4.4% for the first quarter, driven by base rent escalations. Trailing 12-month EBITDARM cash flow coverage in our overall stabilized triple-net lease portfolio for the fourth quarter of 2017, the latest available information, remained stable with prior quarter at 1.6x. TTM coverage in our triple-net same-store seniors housing portfolio also helps today at 1.2x. Please note that our supplemental reports rent coverage on a TTM basis, hence the current reporting does not include the beneficial impact to coverage of the Brookdale Agreement. In our same-store IRF and LTAC portfolio, TTM cash flow coverage was 1.5x, down 10 basis points sequentially as a result of the impact of the LTAC reimbursement change. With recent positive LTAC reimbursement news and continued operational strategies taking hold, we expect our LTACs to generate improving results in 2018. Our skilled nursing assets, principally operated by Genesis, now represents just $20 million of annual rents or 1% of Ventas' NOI. The [SNFs] health coverage at 1.5x in the quarter, but continue to experience industry headwinds on the top and bottom line, trends which we expect to continue.

Finally, Ardent delivered terrific results in 2017, leading the pack across top and bottom line metrics, and enabling strong and stable rent coverage of 3x. In 2018, Ardent is focused on integrating the East Texas Medical Center and Topeka acquisitions, rolling out a new IT system across its platform, refinancing its debt structure, and driving results. We're also encouraged by CMS's better-than-expected 2019 proposed rate of 3.4% for hospitals.

For full year 2018, we forecasted our triple-net portfolio will grow same-store cash NOI between 2% and 3%, within place lease escalations partially offset by the 80-basis point cash impact of the Brookdale lease extension, which is now fully incorporated in our guidance.

Rounding out the portfolio review is our attractive office reporting segment, which now represents 25% of our NOI and delivered healthy same-store cash NOI growth of 2.2% in the first quarter. Let me break out these results between our university-based, life science and medical office portfolios.

Our exciting life science business grew Q1 same-store cash NOI by 3.1%, driven by occupancy increasing by 70 basis points to an outstanding 97.3%. For the full year 2018, we continue to expect robust life science same-store NOI growth in the range of 3% to 4%.

Turning to our medical office business. MOB same-store NOI grew 2% in the first quarter. Our team did an excellent job managing occupancy with tenant retention above 85% in the first quarter. Revenue also benefited from in-place lease escalations that exceeded 2.5%. We continue to forecast 1.5% to 2.5% growth from our strong and steady same-store medical office portfolio in 2018. On a combined basis, we expect our office portfolio of life science MOB assets to grow 2018 same-store cash NOI in the range of 1.75% to 2.75%.

Now on to our overall company financial results and our updated 2018 guidance. Normalized FFO per share in the first quarter grew 2% to $1.05 as a result of total portfolio of same-store growth of 2.6%, in addition to accretive acquisitions and profits from beneficial transactions. Income from continuing operations per share was below prior year, driven by an impairment of our equity in an unconsolidated joint venture holding SNFs that we expect to sell in 2018 at a 9% cap rate on cash rent, and deal costs related to the ESL transition.

Dispositions and receipt of final repayments on loans receivable totaled $300 million in proceeds in the first quarter of 2018. Proceeds from these dispositions were used to retire debt, resulting in improvements in our net debt-to-EBITDA ratio by 0.2x to a healthy 5.5x. We also had strong execution in the capital markets and extended and staggered a maturity profile in February to the successful issuance of $650 million of 4% 10-year senior notes, in order to retire $700 million of maturing 2% notes. In addition, we took refinancing risk off the table by tendering and retiring $600 million of 4% senior notes due 2019.

Let's close out with our updated 2018 guidance for the company. We're excited at this early stage in the year to improve our full year outlook for normalized FFO per fully diluted share to now range between $3.99 and $4.07. This guidance represents both a narrowing of our guidance range as well as a $0.03 increase at the midpoint compared to our previous guidance. Our increased expectations are driven by our strong start to the year, the resilience of our cash flows and the progress against our key initiatives. Notable guidance assumptions include the revised expectation for $1.25 billion in proceeds from asset dispositions in loan repayments, at a GAAP rate of over 8%, the proceeds of which will principally be used to retire debt. Our guidance assumes 100% ownership by Ventas of the assets managed by ESL, the sale of a minority shareholding in the SNF JV, and the impacts of the Brookdale agreement, including a onetime noncash charge of $22 million. For the full year, we are updating our total portfolio of same-store cash NOI growth guidance to now range from 0.5% to 1.5%. With our SHOP and office same-store guidance unchanged and our triple-net outlook revised to include the impact of the Brookdale lease extension.

To close, the Ventas team is very pleased with our strong start of the year, and is committed to execute with excellence against our strategic initiatives in 2018.

With that, I'll hand it to the operator to open the line for questions.

(Operator Instructions) Our first question comes from Juan Sanabria with Bank of America.

Just on the Brookdale lease, I was hoping you could walk us through the impact to the EBITDAR coverage ratio, kind of pre and post, and what you expect that to go to if you're able to execute on the targeted asset sales?

Well, thank you. So we are pleased to announce the Brookdale deal today. It is, I think, a really creative deal that is good for both parties, just the way we like to do our deals. The rent credit, the cash rent credit, is a fairly small amount, as you can see, and therefore, it would have minimal, but positive, impact on the EBITDAR coverage under the leases.

Okay. Is there any material impact from their potential asset sales? I'm just trying to get a sense of why you think this is a good long-term sustainable number? Because it looks like the EBITDAR coverage is still kind of at or below 1x?

Well, the purpose of the deal, Juan, is to give us really a good bridge to a much longer lease term with enhanced credit protection, while we contribute and support Brookdale's operational turnaround. And so our expectation is with 8 more years from now, on the lease, substantial credit protections in the meanwhile, the Brookdale team focused on operating turnaround and the silver wave that we know is coming that, over time, this will be an excellent lease for us and one that we feel really great about. It gives great visibility to our cash flows going forward, and we're very happy about that.

And then just a follow-up on Eclipse. You decided to keep -- it looks like 100% of those assets rather than sell a minority piece. What drove that decision? Was it in any way related to pricing? And just if you could comment on the mechanics of the operator transition? It seems like you've gained occupancy, but then any headwinds you see from here going forward as that transition is buckled down?

What I can tell you is that, we are really happy to have a successful transition behind us. We think the team is aligned and doing great. And so we're happy to own the portfolio. We know it is a very valuable portfolio, and we will continue to evaluate our options, but we did take it out of guidance as you've correctly pointed out. As we reevaluate our options on the portfolio, right now, we like the upside and are feeling good about our decision to move it.

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

Just kind of off of Juan's question related to Eclipse. Debbie, can you kind of describe the upside you see in that portfolio? Is that something that's -- the new team can kind of streamline operations or do we have to wait for better demographics to kind of impact those results?

Okay. Thank you. The occupancy is probably the biggest upside that we see and that's been trending positively since the transition. And the portfolio is really segmented. There's a very large component of sort of stable growing cash flows, and then there's a component where we really think that specialized operating plans can improve performance. And so there's a very targeted plan asset by asset that we see starting to gain traction, and that we hope will deliver improved cash flows over time.

Okay, great. And then can you provide some color on the potential asset sales out of the Brookdale leased portfolio? Have those properties been already identified and have you agreed to sell those specific properties with Brookdale? Or are you still kind of doing your work and doing your research to figure out which assets you want to get rid of?

Well, as you can imagine, my colleague John Cobb and a number of our other Ventas colleagues have been working with Brookdale for quite a little while on the outlines and completion of this agreement. We have jointly identified really a pool of assets that we think would be a good group of assets to sell that would improve the portfolio performance and quality. The final details are yet to be determined, but we think there is directional agreement around a group of assets that would be targeted for potential disposition.

And I'm assuming these assets have lower coverage metrics?

Remember that within a master lease, coverage is somewhat artificial. It really just depends on how you allocate rent within the lease. And so the real idea is to identify assets where you believe that the future operating performance may not be as good as the assets that you're not selling. So it's really about the operational future of the asset, it's not about coverage, which is, as I said, a somewhat artificial allocation within a master lease. So that's how to think about it, which assets are not strategic to the portfolio, which assets do we think have a better upward trajectory in terms of performance. And then segmenting out the ones that we think are either nonstrategic for one reason or another or could be operated better by someone else, that type of thing.

Our next question comes from Smedes Rose with Citi.

I just maybe wanted to turn to SHOP for a moment. You noticed -- you noted that your first quarter results were better relative to expectations, but the full year outlook is unchanged. I'm just wondering, are you more comfortable at the higher end of that range? And do you still hear from your operators that full year occupancy would be impacted by the more intense flu season? Or is there -- has your thinking around that changed at all?

Smedes, thanks for the question. We certainly are pleased with the start, growing 0.7% in the first quarter, always good to come out of the gate strong, and that's, indeed, what we think that we did. One of the things that benefited the quarter, I mentioned, was the reduced number of new openings in the quarter. And we've seen this trend of delayed new openings for the last several quarters now. So our outlook is really assuming that those are going to open in the balance of the year. We're going to see an increase in new units coming online and a consequent impact on P&L. So good start to the year, but obviously, still early. So on that assumption, we're keeping the range.

Our next question comes from Nick Yulico with UBS.

This is Trent Trujillo on with Nick. Wanted to circle back on Eclipse, just potentially for a clarification here. What was embedded in guidance in terms of how much of the portfolio you were going to keep versus potentially JV? Just wanted to get some clarification since now you're retaining 100%, and maybe that had an impact on FFO.

Sure. The guidance assumption in February was that we would sell approximately 25% into the JV, and it would not be consolidated into our results. And so you'll consequent financial impacts on our guidance through the P&L of the decision to keep 100% in the guidance, and therefore, we see a consolidated P&L coming through. So that's the real change in guidance. The impact on FFO is really de minimis.

Okay. And just again, wanted to clarify, what is the latest standing on the LHP loan? I think that was pre-payable starting March. Are there any discussions on that front?

Well, in our guide -- we've consistently projected for the year and continued that, that in and around mid-year, the LHP loan would be refinanced as Ardent continues to do well and wants to consolidate its capital structure into a more streamlined way. And so that's our expectation, but it will obviously be driven by market conditions.

Our next question comes from Rich Anderson with Mizuho Securities.

So if I could just kind of get a little bit into the Brookdale rent issue. So I think if I'm reading this right, you start off with -- at $8 million of a rent concession this year, and it trickles down [and ends] to $5 million in 2025, and there's a process that gets you there. So if I'm adding it up right, $48 million of rent cuts collectively over 8 years. So is the question -- is it appropriate to say that, well, you may be aren't resolving the coverage issue all at once? But you're doing it gradually over time? And then once the, as you call, the silver wave hits in 2025, hopefully, you have achieved the goal of appropriate coverage or even better coverage by that time? Is that a good way to think about it?

It is a good way to think about it. And again, we're trying to create a mutually beneficial agreement, where we can support the efforts of the team to drive operational improvement. We have always said that the best thing that Brookdale can do to create shareholder value is to drive operations. And so we are supportive of that effort, and that's why you see the pattern of the rent credits over time, as you correctly point out. And we would expect Brookdale to -- it's all about improving the EBITDAR of the portfolio.

Yes, okay. And then on the topic of change of control, Brookdale says that you have relinquished your [consent] rights, at least to some degree. Can you give a little bit more color on how that has changed for Ventas as a consequence of this negotiation?

Good, yes. So we have basically modified our change of control rights, so that it has become a more streamlined and objective change of control, that protects the Ventas from -- and Ventas shareholders from the credit side, from the reputational side and operational side, because we have always cared deeply about who takes care of these 100,000 seniors and their financial wherewithal to do so. And importantly, in that situation, that gives Brookdale some flexibility, strategic flexibility. And in that event, we also get some significant enhancements including lease extensions, if a change of control does occur, as I mentioned at the outset.

And if you don't like that -- if someone comes in and replaces them, what is your possible response to that?

Well, I don't think liking has much to do with it. It really is an objective view. Is this a company, a firm, who has significant credit behind its obligations to care for seniors? Is it a company or a firm who has operational experience in senior living, and is it someone reputationally should be in a position to do the things that Brookdale does, i.e. care for seniors and that's very important for us, always has been. So that is our objective, yes.

So if some of those boxes are not checked, you can have a voice?

Right, like if you took over.

Are you kidding me? Last question on the guidance, isn't it mainly an accounting issue really? Now, I guess, the Brookdale rent can no longer be straight line with the inclusion of the CPI element? I assume that's correct. Am my -- am I thinking about the guidance correctly that you just basically...

You're -- yes. Let's simplify for you. What's really good about it is that before we did this deal, our cash rent was higher than our GAAP rent, and by doing this lease extension for 8 years, we -- our GAAP and cash or approximately the same. And so you can think -- I think of it more aligning GAAP and cash and we like that.

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

On the Brookdale front, just curious, Debbie, how you thought about sort of, on one hand, the full recommitment to Brookdale and that entire portfolio versus maybe operator transitions, maybe to ESL, and maybe even SHOP conversions as opposed to strictly keeping it triple-net lease?

Thank you. Bob's feeling like the Maytag repairman here, so I'll be happy to answer that and then we'll move on. Look, we, as I said, want to be a good partner. We want to support Brookdale. We believe this is an excellent outcome for Ventas shareholders and we have retained certain flexibility in certain cases to continue to have optionality, including some asset transitions in certain circumstances.

Okay, and then, maybe on the SHOP side, you continue to cite sort of the bifurcation and performance between high barrier and low barrier markets. I'm just curious if that start to the year -- comparing those 2 sides -- is that about as you expected or did one side do better or worse than sort of what you had built into your guidance?

Thank you for taking care of my partner, Bob, [with that] question. We appreciate it.

Yes, thank you. [So the path is planned here]. Look, I called it stronghold markets in the prepared remarks. The L.A.s, Bostons continue to perform very well. And we've seen that literally over the course of the years and that's both on top and bottom lines, good pricing power, good occupancy, good bottom line momentum. The challenged markets, from my perspective also, are a very common theme -- Atlanta, Chicago, et cetera. And the performance of those, again, roughly as expected. So no surprises really, I think, from that perspective. What is unique and I'd highlight is the delay in new openings which is obviously helpful to give time for absorption to occur and also very notable to us is the decline in new starts which is encouraging for the future, of course. But the profile generally, by market, hasn't really changed materially.

Our next question comes from Jordan Sadler with KeyBanc Capital.

I apologize in advance, I have one more Brookdale question for you, Debbie. Regarding the -- their rights under the timing of the sales, I guess, I'm trying to figure -- there's potentially $30 million of additional rent concession or credit if you -- depending on how much you sell...

No, no, no.

Sorry?

No, no, no.

I was just trying to -- there's a $30 million credit potential, you want to go through that?

No, no, no. Okay, there's -- let's say the portfolio has, rough numbers, in the 1 70s of annual rent, about 15% of that could be sold, we get all the proceeds from that and depending on what the proceeds are, we give a credit to Brookdale at a 6.25% yield, basically.

Is that up to a maximum credit of $30 million? Is that how we should think about it?

The $30 million is somewhat irrelevant to the second part of the calculation, Jordan. So all of your...

Okay. If you sell 400 -- if you sell 480...

Let me try it a different way, think about it this way. All the rent basically that's now there would stay on the portfolio minus net proceeds to Ventas x 6.25%. Maybe that clarifies it for you.

Got it. So you could sell $500 million of Brookdale assets, and give them 6.25% credit on that, theoretically?

Yes, it all turns on proceeds.

Got it. So I guess, my question surrounding those sales, which was really the heart of my question, not the $30 million, but do they have any rights in terms of termination of those leasehold interests? How do they -- or do you have full control over the timing and when those leases will terminate and assets will sell?

Well, again, given just the fact that we think these potential sales improve the portfolio, help Ventas, help Brookdale, and are very positive for both companies, we would encourage that process to happen over the next year or 2, and obviously subject to market conditions. And again, think of the theory is, we would be getting money that we could reinvest into life science, medical office, development, redevelopment, and basically redeploy those proceeds. That's really how to think about it.

Okay. But they can't terminate -- can they terminate those leases at their option?

Well, it's a full-scale sale. So we would -- the idea is there would be no lease at that point in time, there would be a new buyer, be it any person who wanted to buy senior housing, and they could have the benefit of operating that asset, which we think would enhance proceeds. So it's just the sale of the asset to a third-party, which again...

No, I understand. But let's say you guys were dragging your feet in terms of the sale process and how long it was taking, or at least they may have thought you were dragging your feet, and so do they have any rights or control to accelerate that sale?

Yes, I mean, we've worked out something where we think the asset sales are good for both sides, and that we would work cooperatively together on a commercially reasonable timeframe to identify the assets for sale and sell them in the optimal way to the best buyers.

Okay, that's helpful. And then the other one I had for Bob is on the skilled nursing joint venture sale, can you shed a little bit of light on that? Maybe your stake, you said a 9 cap. I just wasn't sure who it is, what it is.

Sure, it's an old joint venture, small, within which, there are about 13 SNF assets and we have decided to sell those assets and as a consequence, therefore, that's the impairment that I mentioned in the first quarter that we recognized. But we'll be selling those assets effectively at a 9 cap rate on cash rent. A small deal ultimately, cash proceeds of call it $80 million our share, gross, but another exit, if you like, of the SNF business for us at an attractive price.

Yes, we're 1/4 of the joint venture so we're selling our 1/4 interest.

And your share would be $80 million gross of proceeds?

Right.

Yes, exactly.

Our next question comes from Chad Vanacore with Stifel.

All right. So I just want to get a little more detail on new Brookdale leases. You mentioned objective metrics on change in control. What are some of those key thresholds on the objective side that have to be met in order to have this change in control?

All right, thanks for the question. Again, let me just recap for everyone. So there is an objective -- there are objective standards for a change in control. If a change in control occurs, Ventas will receive additional protections and enhancements, including lease extensions out to 2029 as well as commitments to CapEx and fees. In order to do that, we have provided basically 3 general objective standards: one is financial wherewithal of the fire; one is reputational; and one is really operational experience in the asset classes. And I'm oversimplifying, obviously, but that -- those are the objective standards principally through which a change in control would be considered.

Okay, is there a threshold on the financial covenant?

Yes, there is significant net worth and leverage requirements.

All right. And then you referenced additional CapEx commitment for Brookdale and possibly Ventas. What are those commitments now amongst the parties and where do they go to under the new lease?

Right. So Brookdale, as the triple-net tenant is responsible for ongoing maintenance CapEx. And then, as we said in the press release, Ventas will work with Brookdale to consider whether it's appropriate to invest additional capital to improve the market positioning and performance of the assets and we would work with them and if we agree, there would be a market return based on the capital invested, which of course, again, would, by definition, improve the quality, and hopefully, the performance of those communities.

So what's the minimum CapEx requirement per year under that new lease?

If memory serves, it's about $1,000 a unit a year.

Okay, that's great. And then you mentioned some additional credit protections in the Brookdale lease? What are you referencing there?

Well, we have tangible net worth and leverage type of requirements. There is typical credit-type requirements to know that, as I said before, a, that the operator is financially creditworthy to conduct the business that it's in, which is typically taking care of seniors, and that those requirements are enhanced if there's a change of control.

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

QCP has put itself up for sale and they seem open to competing bids. I'm just wondering, would a transaction like that, where you have skilled nursing but a different higher-quality operator be of any interest to you?

I'm not sure it passes the SNF test, John.

It looks like a SNF.

That's something that you probably should take up with the parties who are involved in the transaction.

So would that be interesting to you or no?

We are really focused on executing our plan, which is, as we've talked about, really investing in our future growth through our life science and MOB developments and redevelopments, and working with our operators to really drive performance and delivering results for our shareholders.

Okay. And then on the supplements, probably a question for Bob. All of your metrics exclude assets held for disposition, and I'm wondering how big that portfolio is? And if that's equivalent to the $62 million of assets up for sale?

Good question.

Yes. The held-for-sale assets are most materially in there and now the SNF assets I talked about, those 13. Outside of that, there's a dozen or so of intended-for-sale. So it's a very small proportion of the overall, call it, 1,200 properties.

And then some of the REITs within the sector and outside of healthcare are planning to expense internal acquisition and leasing costs in G&A. I was wondering if you're doing that currently or plan to do it in 2019?

That's a great question, and as part and parcel of the leasing standard, which we're working on right now along with everyone else [for implementation] next year. So we'll see how that goes. One of the tenants of that is potentially having to expense those leasing costs. So where we can see that right now and, obviously, we'll report back as we know more.

Our next question comes from Omotayo Okusanya with Jefferies.

So my question is, I am looking at the sup, Page 8, that has your triple-net lease portfolio, the breakout lease segmentation by cash flow coverage. And I'm comparing it against last quarter sup, trying to look for the big change that reflects Brookdale. And if I'm reading this correctly, it seems like Brookdale moved somewhere from 1.2 to 1.3 EBITDARM coverage last quarter to somewhere between 1.1 and 1.2 this quarter. Is that correct?

Yes, I mean, well-spotted, and speaks to our disclosure. The 1.1 to 1.2 bucket, which you see at 8.9% does include Brookdale, as you would imagine is the biggest piece of [triple-net] senior housing, and that did move relative to last quarter. Again, this is all TTM, 2012, so it doesn't reflect any of the agreement we've been talking about today, but on the old agreement, that's the math.

That's the math, okay. So now that I have that correct. So on the old agreement, coverage kind of slipped down a little bit. It's an EBITDARM number, if you adjust that number for about 5, 6 basis points to show EBITDAR, you're still somewhere around 1.1 to 1.15 on Brookdale. So why -- going back to Juan's question, why only a $6 million credit? Why do you feel that was enough to feel confident about the sustainability of the coverage?

Well, it's back to me, I guess. Again, what we're doing here is to extend the lease maturity out for 8 years. We are giving some near-term cash flow support to this new Brookdale team who is focused on driving operational improvement. We received significant credit enhancement of -- that will support the reliability of the future rent stream, and importantly, we are bridging to, really, 2026, when we are quite confident that the silver wave, as Brookdale calls it, will be in full force, and hopefully, customers of all of our senior living communities. And so really, think about it as this lease extension credit, operating improvements and bridging to a period of time where the senior population will be very, very robust, and the demand will be extremely great. And in the meanwhile, again, we have the credit support from Brookdale to carry forward, which, as I said, improves the visibility and resilience of our future cash flows.

Got you. So I think most of us get the logic. I guess, what I was struggling with -- is this $6 million today, and then 12 months from now, we get another press release saying, well, fundamentals deteriorated even further because of supply, so we have to give them another $6 million. I just don't think people want us to kind of go through that death march of 2 or 3 cuts, rather than just kind of take the pain today and we're done with it. So I think we're just looking for some comfort that, that $6 million is it, type of thing?

Well, we feel really great about where we are, and we believe the Brookdale team is very focused on improving operations, which is really the key to everything. And we are on an upward trajectory that extended our leases for 8 years, which people should feel really, really great about. And at the same time, again, we believe we're helping Brookdale to succeed.

Yes. The assets that are targeted for sale, can you give us any indication on what rent coverage on that pool -- on that targeted pool is?

Right. As we talked about before, when you have a master lease, the coverage is based on what we write in the schedule of the asset by asset coverage. So it should be relatively consistent across the portfolio with the lease extension. The focus of the sale of assets for both of us is really to focus on assets that are nonstrategic, maybe there's one in the market, maybe someone else, a local operator, can do better, maybe, we're thinking that the asset doesn't have as good of a future growth profile as the assets that we are retaining. It has nothing to do with coverage, which basically will be consistent across the board by asset as we do the lease extension, but it will have everything to do with our expectations of future performance of the assets. Again, the goal being to improve the quality and future performance of the retained assets by pruning. So I hope that's helpful. Tayo, we appreciate the question and your support.

Yes. One more, just a quick one for Bob, if you don't mind. Just again, the SHOP portfolio again, really good performance in 1Q. Could you just remind us again, like, why you've decided to kind of keep give guidance where it is right now? Like, what are you still kind of looking for before you get more confident about possibly raising SHOP guidance?

Sure. Well, one quarter does not a year make, clearly. And so, we'd like to get some more experience under our belt, frankly. And the range is really driven by the pacing of occupancy -- or pacing of new deliveries and the consequent impact on revenue. And that's what we want to see unfold over the next quarter-or-so to really get a better handle on the full year.

And again, a good start to the year, and we're happy about that.

Yes. Great start. We'll take it.

Our next question comes from Daniel Bernstein with Capital One.

I wanted to actually turn towards development, which is the first comments that you -- almost the first comments that you made in your opening remarks about -- that's focused on your capital allocation. You increased -- it looks like you had a new start with Sunrise this quarter. So can you talk about the opportunities to increase development, and perhaps, redevelopment within your portfolio? Do you think that's going to continue to increase as a percentage of the portfolio? And are any -- do see an increase of operators coming to you for development funding, particularly in senior housing, given that [they're slow to start], and I think there's more limited funding within the senior housing space. I'm just trying to understand the opportunity you see in development?

Well, development is clearly a #1 focus area for us from a capital allocation perspective. And most notably within that, life science. And we've been sharing along the way over the last year or so, the progress there, and we highlighted a few new tidbits today [at] Wash U and at Penn, which is really exciting. We continue to see a robust pipeline of opportunity there with really good risk-adjusted returns and have grown that business even ahead of our high expectations since we bought it several years ago. So we continue to focus on that and see further opportunity. Other trophy assets for development clearly, we continue to pursue. We talked about the Sutter MOB in San Francisco opening early next year. Now approximately 80% preleased, super excited about that. Selective opportunities in senior housing in high barrier markets with operators like Sunrise, we'll continue to pursue. But again, very selective trophy-type assets. But it's really about life science for us as we think about development.

Could that dollar number, which is almost about $650 million now, could that track closer to $1 billion? Or should we think about the development staying around this level?

This is John Cobb. I mean, I could see that definitely getting there. I mean, I think we have some really good partners with Wexford on the life science side, PMB and others on the medical office side, we're seeing some good traction recently. But we do see -- because of our reputation and their skill set, we see a lot of great, really good risk-adjusted high-quality, like Bob said, trophy assets, and some really great markets in California. So it's a really good pipeline.

And importantly, with really well rated, highly regarded institutions, like [Type 10], like Wash U, like Sutter. These are where we're focused and the demand for the product, as John says, the PMB, Wexford and others can deliver is very, very high.

And really good pre-leasing, as you saw earlier, we're signing up preleasing before we start development, and by the time we're opening them, you're seeing some really good traction even during the development period.

And if you look at the yields you're getting on some of these investment grade credits versus their bond yields -- it's kind of what came up with the QCP deal yesterday -- do you think cap rates on some of these assets should be a lot lower over time? I mean, that's -- if the investment-grade hospital credits bonds are 4% or below and you're getting 7%, 8%, is that the rationale for doing more Wexford assets?

You're making a very, very good point, and I'd like to comment in a couple ways: one is that whether it's highly rated health systems or highly rated universities, both of which our new partner, Pete, has a lot of experience in, we see that they have a very robust mission. They want to accomplish a lot of things, they're in a hurry to do it. And even they, the AA-rated, the highly well-capitalized organizations, they still have more uses than sources. And so where we come in and where we have really moved our business is to be able to provide those additional sources in the academic medical centers, in the life science business, in the MOBs, with these highly rated organizations, with brand names. And they are willing to use our capital in these assets and devote the rest of their capital to the academic programming in the case of universities and things like that. And so this is a very good way to rotate our capital, which in the healthcare REIT business has historically been around -- gosh, the REITs have a lower cost of capital, we're going to provide it to people who have higher cost of capital. This is actually a beautiful inverse of that, where we're getting great risk-adjusted returns from really highly rated well-capitalized companies. And as you've seen over the past years, we have significantly rotated our capital allocation in that direction, and as we've said, it's our #1 capital allocation priority for that reason among others. So it's a very interesting concept. I'm glad you raised it, and it's one where we think we've already created a huge amount of value in the $2 billion portfolio we've built in life science, where we think we're in at about 6.75, and we see assets trading at 5 or below. And so that's a big amount of value creation for Ventas shareholders and we will keep plowing that field as long as we can.

We have a follow-up question coming from Smedes Rose of Citi.

It's Michael Bilerman. Debbie, I just wanted to go back to the [manicare] transaction, more so not relative to any Ventas interest, but more so your views about the changing landscape. Clearly, ProMedica and Welltower are trying to make the view that this is not a skilled nursing deal, this is a health system that's coming in and trying to reinvent the skilled nursing space. I mean, do you sort of subscribe to that view? Can you see how something like that could be successful over time? And then maybe, at some point down the road, Ventas may be more interested in getting back into the sector?

Well, Michael, thanks for the question. The one thing I would say is that we've talked about healthcare and senior living being a really large fragmented dynamic space, and you're really starting to see a huge amount of -- there was a lot of horizontal merger activity for a long time, and now you're really starting to see a lot of vertical integration, what we called convergence at one point, across asset types. And if you recall when we first became a partner of Ardent, we talked in -- at great lengths about how these asset types are converging, whether it's hospitals, with out-patient, or post-acute, et cetera. And we really are seeing an acceleration in the dynamism all across healthcare, and that is exciting and it's a place where we feel exceptionally well-positioned to play and to help all these organizations achieve their goals, but also do great for Ventas shareholders. And so there are lots of ways to play. We think we're right in the heart of it all, and I think there's lots of opportunities for us to continue to move the business forward within the dynamism that we see across the landscape of healthcare and senior housing.

Specifically on integrating skilled nursing into a larger health system, I mean, Ardent could potentially go down the road and integrate skilled nursing to the hospital portfolio. Is that something -- I guess, how do you view skilled nursing exposure of your potential tenants in that regard? Is there a changing that you would get more comfortable given your prior comments in the industry as being pretty negative?

We have seen for many years, and I've been working 19 years to get to a place where we are right now within the portfolio, which is -- which I think speaks for itself. I would say that the trends that we see in the skilled nursing business have been significantly negative for a very long time, and we continue to see those headwinds. And there have been a lot of smart people over the years who have waded into the businesses, and it's a very, very, very difficult business. And so we're happy with where we are. We're happy investing in our life science MOB business in the way that Bob described and that's really where our focus is moving our business forward is. And we do continue to see senior living over time being also a good place to be.

Right. Just one last question on Brookdale, I've never seen so many people unhappy that your FFO and cash flow is not lower than you actually got it to be. And so, in some ways, if things get better, and you would've lowered the rent further, you would never have seen that upside over the 8 years that you've extended the lease. But I guess, in regards to that, if things do get worse, you run into this issue where you may have to have discussions. Did a structure of a participating lease with a floor and potential upside come about? Did you talk about maybe having certain assets being SHOP assets, relative to net lease assets? I'm just trying to better understand the dynamic that went into the negotiation?

Well, we killed a lot of brain cells over coming up with what we thought was the optimal solution for both Brookdale and Ventas shareholders that could really -- and I really believe that this is one of the things that our team has great expertise and a track record in, whether it was with Kindred or others, which is really looking at a situation and figuring out, a, how both people can be better off, achieve the goals that they have, and then also optimize the results and advance the interests of Ventas shareholders. And I think this is a really great proof point of that. There were many different ideas and structures that were considered, discussed. Brookdale was, I think, really creative and cooperative in the process as well. And we came up with what we think is the best outcome. And honestly, I'm so glad you said that, because I think we achieved that, and that the constituents of both companies should be really happy with the outcome.

Is that our final question? Okay. So we want to thank everyone sincerely for being here today, for your interest in and support of Ventas. We appreciate everything you've done to make the last 20 years of Ventas such a great success story, and we look forward to seeing you again soon. Thank you.

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