芬塔 (VTR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ventas Second Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded for replay purposes.

I'd now like to turn the conference over to Ryan Shannon, Investor Relations. Please go ahead.

Thanks. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the second quarter ended June 30, 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 in 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.

Great, Ryan. Thank you so much. And good morning to all of our shareholders and other participants, and welcome to the Ventas Second Quarter Earnings Call. I'm delighted to be joined by members of our Ventas team to highlight this quarter's strong results from our balanced and differentiated portfolio, provide an update on our strategic priorities and discuss our improved outlook for the year.

Following my remarks, our CFO, Bob Probst will review our segment performance and financial results in more depth before we welcome your questions.

I'm happy to report that we are ahead of our initial expectations after a productive first half of the year. We have executed on our strategic priorities of recycling capital from profitable and well-structured investments, improved our financial strength and liquidity and invested in our future.

At the same time, we delivered on our financial commitments including growing our same-store cash net operating income, increasing our operating cash flows and reporting robust financial results. In short, we are doing what we said we would and then some.

So let's start with the results and our improved guidance for the year. We were pleased to grow normalized FFO by 2% to $1.08 per share. Our results benefited from the forecasted repayment of our successful Ardent loan and related prepayment fees. This investment yielded an excellent 12% total unlevered return and helped Ardent grow and achieve its strategic objectives.

We are pleased that in the quarter our diversified portfolio grew same-store property cash NOI by 1.3%, and full company cash flow from operations reached an all-time high exceeding $400 million.

Building on our achievements and strong performance year-to-date, our nearly $300 million of Q2 investment activity and visibility into the back half of the year, we are delighted to update and improve both our company-wide same-store NOI cash growth range and our full year expectations for normalized FFO to $4.02 to $4.07 per share.

While Bob will address our senior housing portfolio in detail, I'd like to say a word about performance and prospects in the business. First, we are benefiting from our strategy of partnering with market leaders in our SHOP portfolio; those select operators who have the scale and skill to provide superior care for seniors and manage well in a challenging operating environment.

From a larger market perspective, we were heartened to see that construction starts in senior housing, as reported by NIC, have continued to improve materially and in Q2, reached their lowest level nationally since 2012.

In the second quarter, total national starts were 5,344 units, which importantly was less than half the starts at the construction peak in 2015. If this trend continues, it should, over time, reverse the current supply/demand imbalance in our favor. We remain confident in the market opportunity in seniors housing and are well positioned to maximize the benefits from it. We know that the silver wave of the over-75 population will experience a net gain of 17 million individuals between 2020 and 2035, boding well for our business and giving us confidence in the future, while we manage through current operating conditions.

Turning to our capital recycling and balance sheet initiatives, I'm happy to highlight 2 key accomplishments. First, we've already received over $1.2 billion in proceeds from divesting of profitable investments year-to-date. In the quarter, we reported $36 million in gains from asset sales totaling $137 million.

Second, this week we extended our $900 million term loan at improved pricing. I want to sincerely thank our loyal banking partners for their continued strong support of our company.

As a result of these accomplishments, we have already refinanced or repaid $2.5 billion in debt so far this year, resulting in the best credit profile in our sector.

Our outstanding balance sheet and liquidity position enable us to continue to invest in our future growth. I'd like to highlight our areas of focus and competitive advantage.

First, let's talk about our expanding university-based life science and innovation business, which now generates $134 million in annualized NOI. Two projects opened this year, and 2 other ground-up developments at Penn and Brown are working toward completion. These projects are showing strong leasing trends, and we will begin to see the NOI benefit from these projects in coming periods.

We have a robust pipeline of high-quality investment opportunities with leading research institutions that should enable us to continue to expand this business, which we've already grown by 40% since inception, and it remains our #1 capital allocation priority.

We look forward to capitalizing on our momentum with our partner, best-in-class developer Wexford, as we further build out this exciting part of our business.

Likewise, we also continue to invest in completion of our trophy medical office building adjacent to AA-rated Sutter Health's new $2 billion hospital in downtown San Francisco, which is expected to open in 2019.

Here too leasing activity is strong, and we moved from 52% to 82% preleasing in the second quarter. We are pleased that well-recognized health system, Sutter Health, with its strong balance sheet is a primary tenant in the building.

In addition, we see some incremental investment opportunities coming into focus, mainly through our in-place relationships. The market is still highly competitive. Domestic and global capital sources remain extremely interested in our asset classes, because of the cash flow and demand profile they offer. This interest supports our investment theses and also proves out the significant value embedded in our asset base.

In this environment, we are allocating our time and resources to value-creating investments where we have a competitive advantage, deep relationship or proprietary strategic insights.

One of these unique opportunities arose in the second quarter in connection with Ardent's successful $1.5 billion recapitalization. In completing its strategic recapitalization in June, Ardent improved its cash flow by reducing its all-in cost of debt and streamlined its capital structure.

We supported Ardent's efforts and made an investment with good risk-adjusted return by buying $200 million of its bonds at a 10% yield. We remain very pleased with our Ardent partnership and investment. The year-to-date performance of the public hospital group, up 25%, and high valuation for the recently announced acquisition of LifePoint Hospital are excellent proof points for the value creation from our Ardent investment.

We also want to congratulate our long-standing partner, Kindred Healthcare, for closing on its go-private transaction with 2 experienced health care private equity firms in July. Led by Ben Breier, Kindred is now a financially strong, operationally focused company that will retain and build on its position as a leading national care provider.

Finally, Ventas marked its 20th anniversary on May 1. That's a great moment to recognize the incredible Ventas team for its skill, collaboration and dedication to shareholders and to each other.

Over the last 2 decades, Ventas overcame significant adversity, delivered superior long-term results to shareholders through cycles, built a sustainable balanced business with a high-quality differentiated portfolio and best-in-class partners, generated reliable growing cash flows and dividends and maintained financial strength. We thank all of our shareholders, directors and partners as their support and contributions have been essential to our success.

Sitting here as Ventas does at the exciting intersection of health care and real estate with a large and growing market, powerful demand drivers and a great team, we're confident we will continue to thrive and prosper over the next 20 years.

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

Thanks, Debbie. In the second quarter, our diversified portfolio of health care, senior housing and office properties grew same-store cash NOI by 1.3%. Let me outline our segment performance starting with SHOP, before turning to overall company financial results and our updated and improved 2018 guidance.

Our SHOP NOI performed in line with our expectations in the second quarter, with cash NOI lower versus prior year by 3.1%. Let me unpack that result in more detail. As predicted, the year-over-year occupancy gap in SHOP improved in the second quarter. Specifically, second quarter SHOP occupancy of 87% was 120 basis points below Q2 of 2017, an improvement from an occupancy gap of minus 160 basis points in the first quarter of 2018.

Our SHOP operators did a good job competing for occupancy in the quarter, especially given elevated openings of new communities in Q2. As expected, new units coming online in the second quarter in our trade areas increased 2.5x sequentially.

This heightened level of new competition moderated pricing growth, with second quarter REVPOR increasing 2.1%. Q2 REVPOR included mid-single-digit declines in re-leasing spreads, as new communities competed on price to achieve lease-up.

Meanwhile, operating expenses grew 2.9% in the second quarter. Our operators continue to do a good job managing labor costs. However, to achieve the improving occupancy picture, our operators paid increased costs of customer acquisition, including higher referral fees and marketing expenses.

At a market level, we continue to see NOI growth in our stronghold markets including Los Angeles, Boston and Ontario. This strength was offset by NOI declines in markets affected by new competition, such as Atlanta, Texas, Chicago and certain secondary markets.

Encouragingly, new construction starts in our trade areas in the first half of 2018 remain at significantly reduced levels not seen in the last 4 years. New starts in the first half of 2018 represent just 1.6% of annualized inventory in our trade areas, well below the annualized 2% growth rate for the current 80-plus-year-old senior population.

At this stage in the year, we're pleased to raise the SHOP same-store guidance midpoint by 50 basis points by improving the low end of our range. SHOP same-store NOI is now expected to range from minus 1% to minus 3%, up from previous guidance of minus 1% to minus 4%, with the range dictated by the pacing impact of new deliveries.

Outside of same-store, Eclipse Senior Living or ESL has grown occupancy by over 200 basis points since ESL took over the portfolio in late January. Meanwhile, Kai and team are busy rolling out operational excellence initiatives at the community level. Between occupancy gains and operational initiatives, we expect to mitigate the inevitable disruption in NOI that occurs with asset transitions.

Moving on to triple-net, which grew overall same-store cash NOI by an outstanding 4.9% in the second quarter. In-place lease escalations as well as $2.5 million in cash fees received from the Brookdale lease extension contributed to this increase.

In terms of rent coverage, trailing 12-month EBITDARM coverage in our triple-net same-store seniors housing portfolio held steady at 1.2x through Q1, our latest available reporting period.

In each of the other triple-net segments, coverage declined 10 basis points sequentially as rent has increased, while stronger first quarter results in 2017 have rolled out of the trailing 12-month calculation.

In our triple-net IRF and LTAC portfolio, cash flow coverage was 1.4x, as expected. We expect our LTACs to generate improving results in 2018 with operational strategies mitigating LTAC criteria, further supported by the focus and financial strength of the newly private Kindred Healthcare.

In health systems, Ardent experienced some operating softness in the first quarter of 2018 compared to an exceptionally strong Q1 of 2017. That said, its recent acquisitions, winning operating culture and benefits of scale should produce good results in the balance of the year.

In skilled nursing triple-net, which represents only 1% of our NOI, we experienced a continued decline in Genesis' performance given ongoing industry SNF headwinds.

With an excellent first half, we're increasing our full year 2018 same-store NOI guidance range for the triple-net portfolio overall to now grow between 2.5% and 3%, up from the previous range of 2% to 3%.

Please note that we have not retroactively adjusted our 2017 cash rent for the same-store pool but rather, used 2017 actual rent received in order to provide an apples-to-apples, year-over-year same-store NOI comparison.

Our valuable office reporting segment, which comprises 26% of our portfolio, increased same-store cash NOI by 1.4% in the second quarter. Let's break out these results between our university-based life science and medical office portfolios.

Our university-based life science assets went from strength to strength in the second quarter, growing same-store cash NOI by 4.4%. Occupancy levels are exceptional at over 97%. Meanwhile, rents in the second quarter were up by 4.2% versus prior year in the same-store pool. Even more exciting is the performance of the total life science portfolio, which grew NOI by nearly 24% in Q2, boosted by the success of recently opened projects at Brown, Wash U, Duke and Wake Forest.

For the full-year same-store pool in 2018, we continue to expect very robust life science same-store NOI growth in the range of 3% to 4%.

Turning to our medical office business, this reliable and valuable segment generated roughly 20% of our company NOI. MOB same-store NOI grew by 60 basis points in the second quarter. Tenant retention was an excellent 85%, while in-place lease escalators approximated 3%.

With 1.3% growth through the first half of 2018, we expect NOI to accelerate in the second half and continue to forecast a 1.5% to 2.5% full year increase from our same-store medical office portfolio.

On a combined basis, we continue to expect our office portfolio of life science and MOB assets to grow 2018 same-store cash NOI in the range of 1.75% to 2.75%.

Now on to some key highlights for the overall company's financial results. Normalized FFO per share in the second quarter grew 2% to $1.08, driven by company-wide same-store growth of 1.3% and $0.08 of forecasted prepayment income from the early repayment of our successful Ardent loan.

Meanwhile, we strategically recycled capital with year-to-date dispositions and proceeds from repayments of debt investments totaling over $1.2 billion, effectively achieving our strategic objectives for the full year. Proceeds from this capital recycling have principally been used to retire debt, enabling the company to improve its net debt balances by nearly $1 billion in just 2 quarters.

As a result of capital recycling and proactive risk management, our balance sheet is in outstanding health. Our net debt-to-EBITDA ratio now stands at an excellent 5.3x and our debt to assets is also robust at 36%.

Our maturity profile and duration of debt is also terrific, with less than $1.4 billion in maturing debt through [2020] (corrected by company after the call). Our duration was further extended yesterday through the renewal of $900 million in bank term loans with better pricing and a longer term that exceeds 5 years.

Let's wrap up the prepared remarks with our 2018 guidance for the company. For the second time this year, we're improving our full year outlook for normalized FFO per fully diluted share because of the confidence in our diversified business, operators, asset quality and mix.

We now forecast normalized FFO to range between $4.02 and $4.07, representing over a $0.01 increase at the midpoint and $0.03 improvement in the low end of the range. We're also pleased to raise our total same-store NOI by 25 basis points to a 0.75% to 1.5% guidance range driven by higher triple-net and SHOP same-store expectations.

The implied second half normalized FFO at the midpoint of our updated guidance is approximately $1.91 per share, largely as a result of 2 factors: One, using $1.2 billion in year-to-date capital recycling at 8.6% GAAP yields, principally to retire debt; and two, normal seasonality in senior housing, which typically causes second half NOI dollars to be lower than the first half, a trend more pronounced this year because of expected elevated new openings in the second half.

Also included in our FFO outlook is a previously forecast $0.03 per share Kindred merger fee received in the third quarter. And finally, as is our practice, our guidance does not include any new unannounced acquisitions.

To close, as Debbie commented earlier, we are doing what we said and then some. The entire Ventas team is committed to do the same in the second half of 2018 and beyond.

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

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

Just hoping we could spend a little time on the SHOP portfolio. The second half guidance implies a modest pickup from the second quarter decline of 3.1%. What's driving that? And can you comment on kind of occupancy trends to date in the third quarter? I think, Bob, you touched on that at the end of your prepared remarks. And maybe if you just generally could talk about your thoughts about when fundamentals will trough.

Sure, Juan. So it's probably easy to look at the back half of the year relative to the third quarter. And at the implied midpoint in the back half, we're expected to be about 3% down on NOI year-over-year, and that's obviously right in line with where we were in the second quarter. We raised the low end of the guidance range with our confidence having had now 0.5 year under our belt that was down roughly 1.2% with a strong start to the year, and with some better visibility now into deliveries in the year, which are indeed elevated as expected. So it's playing out pretty much as we thought. Occupancy has been at the better end of our guidance range, both in the second quarter and trending early, very early here in the third quarter to be the same. But the guidance ranges put out at the beginning of the year are holding true at the bottom line and indeed, the piece parts are very consistent with where we were last quarter Juan.

And any comments on when you think the trough may happen in kind of the -- if you have any apprehension to call in that? Is that just really supply-driven based on kind of the deliveries still yet to happen and the lease-up of those facilities?

Yes. The range for the back half is really, again, a function of the timing and the impact of new deliveries. So we saw elevated deliveries in the second quarter. We expect to see the same in the back half of the year, but again, that's a variable that we don't control. And that's certainly something we want to understand before we're going to put out 2019 expectations, so just a bit too early for that. Of course, thinking longer term, the starts data that we shared both for NIC and our portfolio are really encouraging. But as we think about '19, we need to see more of the second half unfold.

Great. And then just on Eclipse, the occupancy gain was very strong, but then you commented that there could be some -- I think, if I didn't misunderstand, some weakness just on the operator transition. So I was hoping you could flush that out a little bit more, and if you can comment really what's driving that occupancy gain there.

Sure. Well, we always expect an underwrite a transition dip. It's just inevitable. We've done this many times. Like anything, when you move from operator A, operator B, there's going to be a change. I think the team has done a very nice job of managing that. It's one of the biggest transitions, certainly, in our experience that we've seen. And Kai and team have done a really nice job to be counter-seasonal growing occupancy when typically it's down, over 200 basis points which is a great number. And as part of that, now really getting into rolling out the operational initiatives that they set out to do from the beginning. So it's proceeding according to plan, but there will be disruption and the plans are in place to manage through that.

Our next question comes from Smedes Rose with Citi.

I wanted to ask you just on the Ardent investment for the -- in your participation in their bond raise, and I think they raised some capital through bank loans as well. Was there a conversation around just sale-leaseback opportunities? Or do you think that there's a place where they would look to monetize their real estate? Or is there some timing around that? You sounded relatively positive on their hospitals in your opening remarks.

Well, you're right that the bank and bonds, it was about $1.5 billion in total capital raise, very successful, improving Ardent's cash flow and reducing its all-in-cost of debt. We were lucky to be able to buy $200 million of the bonds, which we think is a good risk-adjusted return and also we're supportive of Ardent, even though we were, basically, reducing our loan book total by over $500 million. In terms of real estate, as you know, Ardent has doubled and they have taken on some really good opportunities in 2 markets where they have significant market share, and partnership with the leading academics in those markets. And over time, those may be potential real estate investments. But for now, the best approach is to first streamline the capital structure, which is what they did, and reduce the cost of debt and then bring their operating magic to the 2 most recent acquisitions, which gives us and them opportunities as those assets really get to peak operating EBITDA levels.

Okay, that's helpful. And then I just -- I wanted to ask you a question on the reported core FFO and this may just have been a mistake on our part that your guidance did anticipate the essentially an $0.08 prepayment fee for the Ardent loan that was kind of baked in. Because we were looking back and we saw fees, you talked about from Kindred coming in. And I know we didn't capture it in our numbers and I'm just wondering if you could just maybe provide a little bit more color around that, and where it falls in your guidance.

I'll let Bob address that in depth. But we did include it in our forecast, and you'll see that as we stated in the press release that it was in our original guidance. And perhaps Bob can address it in a little bit more detail.

Sure. Yes, we highlighted, as you noted, the Kindred fees, $0.03, expect that in the third quarter, back in February in terms of the fees year-on-year. But at the same time, back in February, highlighted the impact of dispositions including LHP and the loan repayment associated therewith, and there was a $0.10 decline that we talked about which is a net decline year-on-year, in part, netted out by those fees that we received in the quarter, the $0.08. So they've always been in the guidance, in that bucket if you like back in February. And so really, no change there, and it happened midyear as we expected.

Our next question comes from Michael Carroll with RBC Capital.

Debbie, in your prepared remarks, you highlighted that the company's tracking, I guess, incremental investment opportunities. Can you give us some color on what those opportunities are? And what property types they're in?

You're right, I mean, we do see increasing investment, incremental investment activity coming into focus. And most of the things that we are looking at or working on would come from existing sort of proprietary contractual or other relationships that we have and would be in our major asset classes. More of the same in other words.

Okay, and then like the past 6 months to maybe a year or so, you've been more focused on the development -- redevelopment pipeline. Is it safe to say that's where most of your investments will continue to be a focus going forward? Or are you seeing other opportunities to deploy capital into new acquisitions?

Well, that's our principal focus as we discussed, because we are seeing a really great pipeline with great credit in some of these leading university life science and innovation projects, so certainly that's a focus. There may be acquisitions if we find some that make sense and are value creating. But our principal capital allocation focus is in the life science with leading universities, and we see great value creation there, that's why.

Our next question comes from Rich Anderson with Mizuho Securities.

Debbie, how -- what's the plan to finance these incremental investments? Is it primarily through asset sales or do you have -- or is that big enough that you have to kind of think bigger picture to get these things done?

Well, we're always thinking about capital sourcing, and it can range from asset sales to joint ventures to other things. So the greatest thing that I can report on is that our balance sheet now is at 5.3x. We have great liquidity, and so that obviously, provides an asset that can be used to source capital for incremental investment activity as well.

Okay. Bob, you often talk about REVPOR with an O, and I'm wondering if you have the math to tell us what REVPAR is with an A, in the same -- in the SHOP business.

I don't have it readily available, it's certainly something we can follow up with, Rich, if you're interested. I think the trends will likely be quite similar.

Great, just down in absolute numbers?

Yes.

Relative to O.

Yes, yes.

Okay. So maybe you'd talk about that offline, but it kind of leads into my final question, which I just asked on the Welltower call, so -- which is do you think -- when you think about your multi -- or, excuse, your SHOP portfolio and how it compares valuation wise to more conventional multifamily assets, which provide all sorts of good disclosure and all that sort of stuff, as we kind of go through the process of learning more and more about how SHOP is going to exist in this cycle, do you think ultimately, it should be valued about like what multifamily -- conventional multifamily is? Or is it reasonable to say that this should be really a discount to the conventional multifamily business over the long haul?

I'm so glad you asked that question because several years ago, we made the case that it should be valued along the lines of multifamily, because it really does provide core-like returns and incredible resilience in the cash flows. We did work around the financial crisis, for example, that would suggest that it was materially more stable in terms of cash flows than multi over that period of time. And so I do think you can make a case that it should be a core asset and have cap rates along the lines of multifamily. There's some countervailing data or analytics, you could argue. But in general, I feel that the resilience in the cash flow profile and the demand profile, both of which by the way are demographically driven, are very similar.

Well, let it be known that you and Welltower agree on something. So there you go.

Our next question comes from Jordan Sadler with KeyBanc.

I wanted to just touch base, you mentioned in your prepared remarks, Debbie, the LifePoint transaction as a data point, and we also noticed that Envision, a company you guys are probably familiar with, was also privatized in June. Just interest level in participating in the investment or potential ownership in these types of assets?

Well, I do think that our main focus is really showing that the value of the Ardent investment that we've made, given Ardent's high quality and its sort of mini HCA-like strategy. And we do believe in the space but have always said we would be very selective, and we have generally been following more of an urban HCA-like strategy with significant market share. So LifePoint, as you know, is a rural hospital company, and so that's a different animal. And so we like to see the continued interest in and activity in the space and always look to participate where we can, but with this highly selective focus that we've articulated.

Any comment on surgery centers? Or the assets owned by Envision?

Well, surgery centers have been a good asset class. They're owned by a number of hospital companies as well as United Health, so those can be a very good asset class as well. And we own some but not a major business line at the moment.

Okay. And then just one other sort of more administrative one on life -- on the Ardent bonds. Structurally, can -- are those held by the REIT, just as they're, I would imagine, a corporate credit facility?

So our tax guy's eyes just lit up, because you're talking his language. So those would be -- as you infer, those would be held in a taxable REIT subsidiary.

Our next question comes from Seth Canetto with Stifel.

This is Seth Canetto on for Chad Vanacore. First question, just looking at the triple-net portfolio. It looks like there's 9 leases below 1x covered compared to 6 last quarter. Can you just give some more detail into like how large those are, maybe what operators there are? And do you see any capital restructurings with any of those triple-net operators?

At the present time, we feel good about the triple-net senior housing and have projected reliable cash flows for the balance of 2018 there. You're right, a couple of the leases modified a couple basis points over the trailing 12 months through Q1 of 2018 and changed buckets. But overall, very similar performance to where we were last quarter.

Okay. Thanks for the incremental details there. And just shifting gears to the acquisitions. I know we focus a lot on the development and redevelopment pipelines. And specifically, that's centered around the life science and university opportunity. You guys have grown significantly in that arena in the past 2 years. I believe it's up 40%. Can you just talk about the runway there? And how large that opportunity is? And can you achieve your long-term goal growing with just Wexford?

I'm going to be happy to turn that over to our newest executive, Pete Bulgarelli, who is in charge of our office business.

Yes, thanks, Seth. It's a great question, those are questions we love to have. We promised that we're going to double this business at inception. And as Debbie said in her remarks, we've grown it by 40% in the first 18 months or so. And I mean, heck, we're not even across -- except for our 1 development in St. Louis, we're not even across the Mississippi River yet. So we see a great runway for growth.

And this is really one area of our business where we are growing with existing leading universities as you've seen. And we are also being called by and in discussions with that next cohort of leading research universities, and so we're excited about that. And the only governor on it really is our own risk management because we're -- we have a great pipeline there.

Our next question comes from Lukas Hartwich with Green Street Advisors.

So for the SHOP portfolio, expense growth is pretty volatile. So I was just curious if you could provide any comments on the kind of drivers there. Is it just timing issues or what kind of makes it volatile?

Yes. Great question, because you're right, there has been some quarterly volatility. Not unusual. We have noise in there on things like insurance true-ups and so on, which I would look at the first half to try to balance that out a little bit. And we're sort of in the 2% year-over-year range, which I think is not a bad run rate. And we've talked about the fact that wage pressure is in the 4% range, and the way we manage through that is flexing our volume of labor or labor hours and managing indirect costs. The operators have done a really, really good job in the first half on that. We're pleased to see that with some more runway. And have seen some cost of acquisition of new customers, i.e., new residents going up a bit as well in that 2%. But that's a pretty good run rate I'd say.

That's helpful. And then just 1 quick follow-up. Can you talk about cap rate trends just across your property types?

Well, as I mentioned, because there continues to be really strong interest from all sorts of capital in our asset types because of the cash flow profile, we talked about in discussing multifamily, because of the demand profile we talked about, cap rates are staying very firm. And that's why we're really focused on some of the capital allocation priorities we enunciated, and we're really focused on the kind of proprietary or contractual pipelines that we have with some of our partners like Ardent, like PMB, like Wexford, like Atria, et cetera. So that is where we're focusing because we have a competitive advantage there.

Our next question comes from Jonathan Hughes with Raymond James.

So earlier, Bob, you talked about the inclusion of the Ardent fees in core FFO, but the Brookdale fee was excluded. And I understand the Ardent prepayment was expected, but isn't the whole point of a normalized figure to remove outliers like the Ardent fee that was 7% of normalized FFO per share, that goes away in the third quarter.

Yes, I'll be glad to take that question. So we are the leading provider of capital to high-quality health care companies. And part of our business, historically, has been and continues to be a loan book of business. And that loan book generates cash prepayment fees and other types of fees, as do our leases by the way, on an episodic basis, but are part of our ongoing business. And so as those items are cash and part of our ongoing business, we have historically and continue to include them in our normalized FFO. The Brookdale item that you -- to which you refer is really a noncash item that was done as part of our lease extension and is a very different type of item. And thus the consistent treatment of those items, one is in, one is out.

We also make a clear point of calling out the number too, and investors can see it quite clearly and choose to do what they want with that, but it's very apparent in the number.

But that's the reason, yes, that's the reason.

Okay, and then presumably the Kindred fee will be included in 3Q normalized FFO then (inaudible)?

Yes. Yes.

That's correct.

Okay, all right. And then just one more from me and kind of an extension of Rich and Lukas' questions. But with SHOP now about 1/3 of the company, I know I would find it helpful if we could get additional disclosure there on components of expenses, maybe even new and renewal leasing spreads within that segment. And I know rental rate growth is pretty stable in the low single-digit range, but is this breakout something you could provide us for the second quarter or maybe in supplements going forward?

Yes. We -- in our prepared remarks, I did mention the re-leasing spread at down mid-single digits. And I think we're probably one of the few who actually quote that number. I think it's a really important number. Other industries, like multifamily, they quote that. We have some maturation as an industry to get to that with some common definitions of price and so on. But I do think that over time, we should, as an industry, strive to be transparent on that.

Thank you.

And then what about new spreads? I mean, you mentioned renewals are down a little bit, or new leases, are they flat, are they up a little?

SHOP new leases?

Yes, correct.

Yes, I mean, market is -- where there's new competition, is down clearly.

Our next question comes from John Kim with BMO.

On your senior housing triple-net coverage right now is covering around 1x EBITDAR, are we going to see more transitions to SHOP and how willing -- how high are you willing to take your SHOP exposure?

So look, every situation is treated on its own. We are happy with the transition that we made from triple-net to SHOP as Bob described with ESL, and you could see by the leasing velocity that, that can prove to be a really good decision. And as we look at the forward landscape or any individual decision, I would say it really depends on what we see the forward environment to be in terms of what action we could potentially take. So we're pretty expert at those kinds of transitions and also with those kinds of decisions.

Okay. And then a question on merger-related expenses, which is an add-back to normalized FFO. It's already well ahead of last year's total. You have another $13 million or so that you expect to -- basically, expect to have in your guidance for the remainder of the year. What is driving this? Because I don't necessarily think that you've been more active this year than last year on merger activity?

Yes, John, transition-related costs are also part of the deal cost bucket. And obviously, the ESL transition being most notable within that, so that's the primary driver.

So what's -- what exactly is that $27 million? Is it paying internal people, external, is it audit changes or?

All the above, indeed. There are internal, external costs associated with making a transition of that nature, legal costs and things like that for sure.

All right. And then Rich Anderson brought up the multifamily multiples. I'm wondering if we can get an update, Debbie, on your views of age-restricted multifamily?

Interesting. I would say that my views are continuing to evolve as I learn more. There's -- it's a really interesting question. You have things like Equity Lifestyle, which is not really age restricted, but it is really a demographically driven kind of a business. You have age-restricted apartments, which are more what you're talking about and then you have senior housing. And each of them has their own positives and negatives, and I think ours are strong demographically driven, reliable cash-flow businesses. So big picture, we like them, but my views continue to be educated and evolve.

Would you look to enter through partnership or do it on your own, if you do, depending on these asset classes?

Well, once our investment thesis has fully evolved then I'll be able to answer that question.

Our next question comes from Tayo Okusanya with Jefferies.

So my question really is around senior housing, and just again, your results today, WELL's results as well, seem to be raising all these questions, again, of kind of when does this thing kind of bottom out. I think at NAREIT -- there was an expectation that things were quote unquote, "feeling better." But then, we get the NIC 2Q data, we get results and then the NIC data also kind of pointing to the fact that despite improved absorptions that was through expecting declines in occupancies over the next 12 months. So kind of against that backdrop, how do you think your portfolio ends up performing? How do you think about need to do additional restructurings, et cetera, et cetera?

Good. Well, let's start out by saying that we are right in line with where we thought or even a little bit better as we articulated in the beginning of the year. And I think Bob has done a great job over the past couple of years and continues to have really good forecast framework for investors to think about as they think about the forward environment. And we did talk about the fact that our guidance ranges were, in part, driven by the pace -- the volume and pace of new deliveries, which we expected to pick up throughout 2018. So again, we feel very much in line with where we thought, and I'll let Bob kind of take it from there.

Well, you're right to say looking beyond NIC has said there'll be negative absorption. So that's 1 data point. I just circle back to we still need to see the back half of the year and the pacing and timing of deliveries really to make some assumptions around bottoming. But we are where we thought we'd be.

And the main point, the big main point continues to be starts are going down, the number of the seniors is going up and there is a timing mismatch between the deliveries and this increase in the senior population. And we are in the process of working our way through that, but it will be very powerful on the other side, and we are well-positioned to take advantage of that. That is the big picture.

But in the meantime, again, it's -- you kind of have this 12 to 18 months process of trying to -- where also the 2 factors are somewhat conflicting before everything moves positively. What's the risk in that period that you do have to do additional restructurings or a tenant goes bankrupt because they don't have the 18 to 24 months to make it through?

Well, as we've talked about before, this is partly why we have a diversified portfolio. It's partly why we have a differentiated portfolio. And we are in a cycle, and I think well-positioned to work our way through that. And as you saw in '18, we've improved our guidance.

Okay, that's helpful. I think, again, it's an interesting time, and I do think it's a period where you're going to end up with some haves and have-nots over the next 12 to 18 months.

Well, we feel like we're in a good spot, so thank you.

Our next question comes from Todd Stender with Wells Fargo.

You've now seen Ardent's ability to tap the debt markets. I know it seems like a high coupon to us. But maybe, just like you alluded to, Debbie, it lowered their cost of debt. Post offering, post them paying down the note to you guys, what's your appetite to provide incremental capital to Ardent? That's one. And then part two is just hospitals in general.

Good. Oh absolutely, I mean, Ardent's average weighted cost of debt was improved significantly with the recapitalization, so you're right about that. And look as -- in our role as their partner, and in our role as a leading capital provider to successful care providers, we are continuing to provide growth capital to them and would over time should there be opportunities that are mutually attractive. So that's where we stand.

So their cost of debt at 9.75%, where would you guys be comfortable? Has that raised or lowered your required rate of return with Ardent?

So remember, that is with 1 part of the capital structure. The overall part of the capital structure with bank and bonds is substantially lower than that. So that's very important for you to understand. And then what was the question?

Just, I guess, appetite to grow along with Ardent at this point? And then just hospitals in general.

Well, as stated, I think we -- if there are mutually beneficial opportunities with Ardent, we are happy to be their partner and pursue them. And in terms of other activity, I'm heartened to see the great interest and the performance of the hospital space this year, which is up 25%. But we are continuing to pursue the articulated strategy of being very selective in the space and doing business with the winners. And that's the basis on which we would consider additional opportunities.

Our next question comes from Daniel Bernstein with Capital One.

So I was looking back at your supplemental and go back to 1Q '17, you only had 1 development in SHOP; today you have 5. So just wondering what opportunities you see there? And in development, given the rest of the space is kind of pulling back, do you see opportunities to increase your development in SHOP, as you look out 2 or 3 years where the supply/demand might be?

Well, good question. I think that as I alluded to, we are focusing on these areas of investment where we have long-standing relationships. Most of those, if not all of those 4, would be developments with Sunrise and maybe 1 or 2 with Atria, in really high, demographically attractive areas and where we see potentially good risk-adjusted return. And in each of those cases, we are doing those in joint ventures with pension fund capital. So that's part of the type of investment that I said we can focus on as part of our relationship business.

Are there pension funds and private capital, are they concerned about where the fundamentals are? Are they looking forward? I mean I'm just trying to understand how the non-REIT players are thinking about it.

Yes, I can say, without qualification, that the sovereign wealth types and the pension funds who are matching long-term liabilities with assets are wildly interested in senior housing because they see -- again, just for the same reasons, they see the demographic demand, they see the cash flow profile and resiliency over long periods of time. And that is what attracts them to the space.

And they prefer development over acquisitions or are they individual?

I mean, it depends on the investor. It can be both but they just look right through this timing mismatch that we discussed.

And our last question will come from Karin Ford with MUFG Securities.

I wanted to ask about Brookdale. Just I know it's only been a few months but wanted to know how the operations have been going there. And are you still thinking about 15% as the right number for potential portfolio asset sales?

Great. Glad to remind everyone of our mutually beneficial Brookdale deal that we announced last quarter, which extended our leases at least out into 2026. Part of the thesis there is that the new management team is focusing on operational initiatives, and we are trying to support them in that endeavor. And I think it will be best for you to stay tuned as they continue to report. But one would expect it will take some time for those initiatives to take hold, but I would encourage you to tune in for their quarterly report.

And have you started marketing any of the assets in that portfolio? And if so, how's been the interest on them?

We're going to do that over time. We have not yet started. As you correctly point out, part of our deal was not only the lease extension, but also the ability to potentially prune the portfolio at disposition rates that are effectively 6.25 on our rent, and we will undertake that over time.

Okay, so we are very happy to be with you this morning. We sincerely appreciate your support, your interest in Ventas. I hope everyone has a great summer, and we look forward to seeing you in September. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.