芬塔 (VTR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-quarter 2011 Ventas, Inc. earnings conference call. My name is Jess and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David Smith, Manager, Investor Relations and Capital Markets. You have the floor, sir.

Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the quarter ended September 30, 2011.

As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events.

The forward-looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ materially from the Company's expectations whether expressed or implied. We refer to you to the Company's reports filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2010 and the Company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the Company and its management.

The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.

Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation 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.

Thanks, David and good morning to all of our shareholders and other participants and welcome to the Ventas third-quarter 2011 earnings call. We are so happy to be with you today reporting on excellent results that, for the first time, include a full quarter of both our Atria and NHP acquisitions.

Together, these acquisitions improved our private-pay NOI percentage, significantly diversified our business, increased our percentage of NOI from high-quality private-pay senior housing and were accretive to earnings. Importantly, all of this occurred with a very, very strong balance sheet.

First, I want to thank the more than 60 investors and analysts who attended our New York Atria property tour on October 20. The tour showcased seven of our high-quality private-pay senior housing communities managed by Atria. Those who attended undoubtedly could see why we acquired the portfolio. These communities knock your socks off in terms of physical plant, location in wealthy submarkets and high service levels.

Atria, the fourth-largest assisted-living operator in the US, also highlighted its commitment to delivering a gold standard customer experience for its residents and its track record of delivering high returning, environmentally-focused redevelopment projects.

Today, I will provide a brief overview of the quarter and discuss how we are executing on our larger, more diverse platform. Ray will review our portfolio performance and Rick will end with a detailed review of our financial results. Following our presentation, we will be happy to take your questions.

In 2011, Ventas completed $11 billion of acquisitions and today, we are a $20 billion plus S&P 500 company with multiple avenues for growth that generates $1.4 billion of diversified NOI from over 1300 properties with the lion's share derived from private-pay sources. We continue to focus on delivering consistent, superior total return to our shareholders by growing cash flows and managing enterprise risk.

Ventas' balance sheet, ratings and liquidity continue to be excellent aided by our Atria and NHP acquisitions. Our current net debt-to-EBITDA is an outstanding 4.7 times and our current fixed charge coverage well exceeds 4 times. These industry-leading credit statistics position us with significant dry powder as additional attractive investment opportunities come our way.

The rating agencies have recognized the benefits of our diversified platform, size, increased tenant/operator relationships and strong balance sheet. Both Fitch and Moody's upgraded Ventas' credit ratings during the third quarter to BBB+ and BAA2 respectively.

We have also continued to reduce our borrowing costs and increase our liquidity. Not only did we issue $700 million in 10-year bonds in May at 4.75%, we also closed a new $2 billion unsecured revolving credit facility in October. This new facility added $1 billion of liquidity, extended the maturity from early 2012 to late 2016 and significantly improved our pricing. At LIBOR plus 125 basis points, we currently have the lowest healthcare REIT spread in the revolver market.

We will remain relentless in our focus to drive down our capital costs, as well as maintain financial strength and flexibility going forward. These dual attributes will allow us to be both opportunistic and safe.

Our NHP integration efforts are proceeding well. Our teams are working effectively together and we are on track to realize the $15 million in G&A synergies we previously announced, a savings of 50% from the NHP run rate.

We are also executing on the growth aspects of our powerful consolidated platform. In October, we closed over $150 million of investments, which included two MOBs under our Lillibridge platform, one senior housing asset that will be added to our Atria portfolio and another triple net lease senior housing asset with a new, highly desirable operating partner.

We had a great quarter as a result of our acquisitions and our team's execution. Ventas reported normalized FFO per share of $0.88, a 20.5% increase over the third quarter of 2010. Our NOI is growing and diversifying. Our FFO and cash flow per share are increasing and our balance sheet is industry-leading. Even if you choose to eliminate all of our net non-cash income, Ventas' FFO would be $0.82 per share this quarter, representing 12.3% year-over-year growth and extremely high-quality results. With the benefit of NHP, we now expect full-year 2011 normalized FFO per share to range between $3.34 to $3.36 per share, an increase of $0.15 at the midpoint over our prior range.

So in sum, we are very pleased with our position, both financially and strategically, following our recent transactions and we look forward to harvesting the benefits of our assets and our platform going forward for the benefit of our shareholders. Ray?

Thanks, Debbie. With the Atria and NHP acquisitions, our balanced portfolio now includes over 1300 properties in 47 states and two Canadian provinces, contains over 100 tenant/operator relationships and is diversified by asset class and payor source with the vast majority of our NOI coming from private-pay assets such as seniors housing and medical office buildings.

Ventas' portfolio continues to provide consistent and reliable cash flow growth. For the third quarter, our same-store portfolio of 597 properties provided strong cash flow growth of 3.4% over the third quarter of 2010 after adjusting for a $2 million cash payment received from Sunrise and equalizing the management fee in the 2010 comparison period.

Moreover, our same-store cash flow growth statistic includes only those properties that we owned in both periods and therefore, it does not get the benefit of the high-growth Atria-managed assets that we acquired in the second quarter of this year.

First, I would like to discuss our triple net lease portfolio. This portfolio now includes all of the NHP properties and accounts for 61% of Ventas' NOI. It contains over 900 properties and is well-diversified across the seniors housing, skilled nursing and hospital asset classes.

Cash flow coverage in the entire triple net portfolio was a solid 1.7 times rent through the second quarter of 2011, the latest date available. Furthermore, same-store cash NOI growth was 2.7% over the prior year driven primarily by contractual rent escalations.

As a point of clarification, we report our triple net lease coverages one quarter in arrears. As such, this combined coverage information is only for the legacy Ventas portfolio and excludes the NHP portfolio, which we did not own in the second quarter.

In order to provide visibility into the consolidated triple net lease portfolio, including the NHP assets, we have provided five quarters of historical occupancy and coverage data by asset class in our supplemental. For all three asset classes -- seniors housing, hospitals and skilled nursing -- coverages were stable and occupancies were consistent with historical levels during the comparison periods.

As many of you know, Ventas has strategically invested with the goal of diversifying its portfolio and increasing its private-pay revenues. As a result of the $11 billion plus of acquisitions that we have completed, private-pay assets now provide nearly 70% of our NOI.

In addition, our skilled nursing portfolio continues to perform well. Consolidated skilled nursing portfolio cash flow coverage, including our Kindred portfolio, was a healthy 2 times in the second quarter. Assuming a 13% cut to Medicare revenues on average and a 25% mitigation on average by our operators, coverage would still be a healthy 1.7 times all other things being equal. So we continue to believe that our skilled nursing rents are well-covered and should provide sustainable cash flow to Ventas.

Now let's turn to our seniors housing operating portfolio. As previously mentioned, this is the first full quarter of operating results for the 117 communities managed by Atria that were acquired on May 12. Combined with our 79 highly productive assisted-living communities managed by Sunrise, we now have a portfolio of 196 senior housing operating properties, which account for approximately 25% of our annualized NOI. This portfolio is located primarily in high barrier to entry coastal markets with strong wealth demographics and contain some of the very best assets, markets and operators in the industry.

Ventas' Sunrise portfolio of 79 high-quality mansion-style communities continued to deliver solid performance, generating $40 million of NOI for the third quarter, which is a sequential increase of 1.2% and represents the second-highest quarterly NOI since we acquired the portfolio in 2007. Year-over-year NOI increased a strong 5.6% after making the previously mentioned adjustments for cash payments and management fee in the 2010 comparison period. And year-over-year average daily rate grew a solid 4.1%.

Resident occupancy for this portfolio increased 120 basis points sequentially to 90.6% compared to the second quarter of 2011 and based on recent performance, we expect average occupancy for our Sunrise portfolio to be up slightly for the fourth quarter as well.

So as you can see, our Sunrise portfolio continues to perform right in line with the assumptions we have provided in February for rate and occupancy in 2011.

Before I leave Sunrise, I just want to give a quick reminder that we negotiated a reduction in the management fee that we pay to Sunrise at the time we purchased Sunrise minority interest in our portfolio in December of 2010. Beginning in January 2012, the base management fee will return to 6% of revenues from the current 3.75% level.

Now let's turn to Atria, which also delivered solid performance in the third quarter and was in line with our expectations. NOI for the third quarter, our first full quarter of ownership, was $47.5 million. This reflects high single-digit growth over the prior year when Atria owned the portfolio and is consistent with what we projected when we acquired the portfolio. And like our Sunrise assets, the Atria communities also experienced positive occupancy trends during the third quarter with average unit occupancy up 60 basis points to 87.4% since June.

During the quarter, we moved two assets from redevelopment into the stabilized pool -- one high-end assisted and independent living community on 86th Street in New York, which achieved 95% occupancy during the third quarter and another asset in Sunnyvale, California, which was at 94% occupancy during the third quarter. We also commenced redevelopment on one asset during the quarter and our redevelopment pool now consists of six properties, which contributed $1.2 million of NOI in the third quarter.

Both lease-up and rate growth trends in this portfolio are very positive. For example, we opened one asset in Glen Cove on Long Island in September that is currently over 40% occupied. Separately, another green assisted-living community in Westchester County that opened in April is now over two-thirds occupied with rates of approximately $7,000 per month, over 60% above the rates that the building generated prior to redevelopment.

We continue to be impressed by Atria's unmatched redevelopment expertise. We are excited about the redevelopment opportunities in our portfolio and look forward to announcing additional projects in the coming quarters.

So both our Sunrise and Atria portfolios are performing well, tracking the guidance that we have provided earlier this year and as the largest owner of seniors housing in the US, Ventas should continue to benefit from the positive supply/demand fundamentals in the industry. Construction starts compared to overall inventory continued to be very modest and totaled less than 1% of overall inventory for the third quarter.

Moreover, demand is increasing as the 85 plus population, which is our target market, continues to grow at 3 times the rate of the overall population. These positive fundamentals should continue to drive performance in our seniors housing operating portfolio where we are the direct beneficiary of the NOI at the communities.

Now I would like to briefly discuss Ventas' medical office building portfolio, which accounts for 11% of the Company's NOI. Ventas' owned medical office portfolio now totals over 230 medical office buildings and including our managed properties spans across approximately 14 million square feet. The vast majority of these medical office buildings are on campuses of leading hospital and health systems.

As you know, Ventas' medical office portfolio has grown significantly over the past five quarters due to our Lillibridge acquisition in July of 2010, along with our recent NHP acquisition, which came with a strategic relationship with Pacific Medical Buildings and exclusive rights to over $1 billion of future development for class A medical offices. As a result, Ventas is now the largest, fully integrated owner, manager and developer of medical office buildings in the United States with a coast-to-coast presence.

Our medical office portfolio delivered another quarter of consistent performance. Our total owned same-store medical office portfolio delivered another year of consistent performance with year-over-year cash flow growth of 2.6%. Year-over-year, our 57 consolidated same-store stable assets generated $12 million of NOI, consistent with the comparison period and an occupancy of 93.5%, which is comfortably above industry averages. Sequentially, our consolidated same-store stable portfolio contains 63 properties that delivered similarly strong and consistent performance in NOI and grew occupancy by 30 basis points.

With the addition of NHP, our stable owned portfolio now contains 169 properties, an increase of 106 properties over the Ventas stable owned portfolio in the second quarter of 2011. This portfolio is 91.6% occupied and accounts for over $137 million of annualized NOI.

Trends in our medical office business are very positive. During the third quarter, we experienced an increase in leasing activity, including new and expansion leasing. During the third quarter, our same-store weighted average tenant retention rate was 84%. We are also experiencing an uptick in request for proposals on new development with eight projects totaling about $80 million for which we have been awarded exclusive rights to work on development.

With over 14 million square feet owned and managed, our MOB portfolio provides the scale and financial performance to leverage the full-service capabilities of our Lillibridge platform. Coupled with our partnership with Pacific Medical, we now have the fully scaled, multi-capability medical office platform that we set out to create just four years ago.

Just a quick note on acquisitions before I turn it over to Rick Schweinhart. As you know, we closed our acquisition of NHP at the beginning of the third quarter and we have been intensely focused on integrating and assimilating this transaction since we announced it in February.

With respect to the external environment, conditions remain very fluid. During the third quarter, moderating expectations for domestic economic growth, volatility in the capital markets and the impacts of larger-than-expected CMS reimbursement reductions injected some caution into the markets and served to reinforce the value of diversification, private-pay revenues and stable growing cash flows -- three important strategic themes in our acquisitions of NHP and Atria.

However, as the capital markets began to stabilize and improve in September, we also saw an uptick in actionable senior housing and MOB investment opportunities and our pipeline is pretty active heading into the fourth quarter. In fact, we have about $200 million of primarily MOB properties under contract and at various stages of diligence.

In addition, subsequent to the quarter-end, we closed three separate transactions totaling $150 million at an average yield of 7.75% and comprised of two senior housing assets and two medical office buildings. With these transactions completed and under contract, our originations team will have acquired approximately $1 billion of asset level deals in 2011.

Looking forward, we are well-positioned to find and win transactions with our regional origination capabilities, our numerous strategic relationships with operators and health systems and our strong balance sheet and competitive cost of capital. However, while we should have sufficient opportunities to deploy capital, we intend to continue to invest with discipline, focus on delivering reliable and growing cash flows to our investors and grow our portfolio in a strategic and thoughtful manner. Rick?

Thank you, Ray. There were three major events in the quarter and one following quarter's end. First and foremost was that, on July 1, we purchased Nationwide Health Properties Inc. by issuing 100 million shares and assuming debt of $2 billion. NHP's results are included in our consolidated statements of income for the entire third quarter.

Second, also in July, we borrowed funds on our revolver to repay $339 million in NHP's maturing senior notes and $200 million in Ventas' 6.5% senior notes due 2016.

Third, in August, we received our litigation award of $102.8 million from HCP and used the proceeds to pay down the revolver.

Now let me talk a little about third-quarter results. Third-quarter 2011 normalized FFO was $0.88 per share, per diluted share, an increase of 20.5%, compared to the third quarter of 2010 per share results of $0.73. Normalized FFO increased 120% to $255 million compared to last year's third quarter of $115 million.

Normalized FFO in the third quarter includes a full quarter of our second-quarter Atria acquisition and a full quarter of our NHP acquisition. It excludes the net benefit totaling $9.2 million from net litigation proceeds and income tax benefit, partially offset by merger-related expenses and deal and integration costs, mark-to-market adjustment for derivatives, loss on extinguishment of debt and amortization of other intangibles.

Third-quarter normalized FFO increased from last year's third quarter due to NOI increases in all three of our segments -- triple net, senior housing operating and medical office, as well as income from loans and investments. Triple net lease revenues grew to $211 million from $118 million last year, primarily due to NHP and also due to contractual escalations.

Seniors housing operating NOI increased $48 million in part from improved Sunrise operating results and principally due to the Atria acquisition. The Sunrise-managed portfolio grew to $40 million this quarter from $39 million last year. Last year's results included a $2 million cash payment from Sunrise for expense overages.

Third-quarter medical office building NOI grew to $41.3 million from $18.3 million last year, primarily due to NHP. Both periods include $1.3 million in unconsolidated joint venture earnings. Income from loans and investments increased to $10 million this year from $4 million last year due to NHP's portfolio.

On the expense side, consolidated interest expense increased to $74 million this year from $45.5 million last year, reflecting the assumed debt into Atria and NHP acquisitions, as well as all the debt activity in the last year.

Looking at sequential results, normalized FFO increased $113.5 million to this quarter's $255 million. The principal reason for the increase is the NHP acquisition effective July 1 and a full quarter's results for the Atria portfolio, which we acquired mid-second quarter.

Interest expense increased by $20 million in the third quarter compared to the second quarter, primarily due to assumed debt of NHP and a full quarter of Atria. Even with that increase, our interest expense coverage is fantastic at over 4.5 times.

We continue to focus on maintaining a strong balance sheet and increasing cash flow from operations. At September 30, our cash balance was $57.5 million and we had $474 million outstanding on our revolving credit facility and $250 million outstanding on our $800 million term loan. With our new revolver and assumed term loan, we currently have net liquidity of $1.8 billion. With our new revolver, our weighted average debt maturity is over six years. At September 30, our credit stats were net debt to adjusted pro forma EBITDA at 4.7 times, our fixed charge coverage ratio in excess of 4 times and debt to enterprise value, 31%.

Let me recap our third-quarter dividend, which was divided into two installments on account of our NHP acquisition. On July 12, we paid a dividend to stockholders of record prior to the NHP acquisition of $0.1264 per share. On September 30, we paid a dividend of $0.4486 per share. The combined amounts total $0.575 per share, which is the same dividend we paid for the first and second quarter. Our FFO payout ratio is an excellent 65%.

Fully diluted weighted average shares outstanding in the quarter were 291 million shares, an increase of 84% over the third quarter of last year and 63% over the second quarter. Our fully diluted share count already covers all the shares we are likely to issue when our 3 7/8% convertible senior notes mature on November 15, 2011.

We are increasing our 2011 normalized FFO per-share guidance and tightening the range of our guidance to $3.34 to $3.36 from $3.17 to $3.23. We expect our fourth-quarter normalized FFO per share to range between $0.87 and $0.89.

This increase in annual guidance is the result of better operating results and the inclusion of about $0.12 of net non-cash earnings in the second half, primarily due to purchase accounting adjustments. Many of the non-cash components will burn off over time, so we are going to try to call them out separately in the future so you can see movement in the cash portion of results.

Because of the increase in our FFO and large change in our weighted share count, it is possible that the full-year computation of FFO per diluted share could be as much as $0.04 higher than the sum of the four reported quarters. That is why we have provided separate fourth-quarter FFO guidance. Operator, let's take our shareholders' questions.

(Operator Instructions). Michael Bilerman, Citigroup.

Good morning. Under the rules --

Hi, Michael.

Good morning. I am not allowed to be a shareholder under SEC rules.

Okay, but you can still ask a question.

But I can still ask a question.

Yes.

A question on the development, which you include now in the supplemental on page 17, you have about $131 million of spend that is listed, the majority of which is the one asset for PMB and then Brookdale. And then, Ray, I think you talked about $80 million of potential new MOB development that you are targeting. How should we think about development spend in that portion on your business in terms of driving growth?

Michael, I think we will always do a modest level of development relative to our total portfolio size. And as you see on the schedule on page 6 in our supplemental, it is a reasonable pipeline of development. We look at development as an opportunity for us to add new properties to our portfolio, enhance existing relationships and drive higher yields than the acquisition side, so to put a little extra alpha in the portfolio and this pipeline of opportunities should do that.

And you expect it to grow, I guess adding that $80 million, that this probably could be a $250 million to $400 million pipeline over time?

Yes, I would say at the upper end, yes.

And that is -- again, it's about less than 2% of our total balance sheet, even at $400 million.

Thinking about it just from a tenant and asset management perspective, one of the benefits of doing a lot of these transactions was diversifying your tenants. And your top five tenants have gone from 86% of NOI down to 62% of NOI. But those under 1% jumped dramatically from under 4% of NOI to over 26%. So just a lot of smaller individual tenants that came out of the NHP portfolio. I guess as you have taken those over, what are you sort of -- before you used to have -- you had five people you called and you got a pretty good sense of your portfolio and how the tenants were doing. Now it is a much bigger exercise and I am just curious from a management perspective how you are dealing with that and sort of what the health is of a lot of those smaller tenants that you have.

Yes, that is a great question and we are very happy that we've further diversified our portfolio and have increased our tenant relationship 6 times. I mean that was one of the positives of the NHP transaction. As you correctly point out, there would be a different asset management style and perhaps span of control when you have multiple smaller relationships. And Ray and our Head of Asset Management, Tim Doman, who are here with us today, have been spending a lot of time basically dealing with organizational structure going forward. We have obviously retained the NHP asset management group that has the historical knowledge of the portfolio. And we would expect to have a larger asset management group as we go forward to manage that portfolio. But it is a real positive again that we have multiple tenant relationships. Those are areas for future growth and they also minimize risk in the portfolio.

I would just add one point to that and that is that, before we acquired NHP, we had a highly scalable asset management system. And we have been able to get the NHP data uploaded into the Ventas asset management system and that has enabled us to continue to have visibility into all of our tenant/operator relationships. So a lot of focus on that during the integration phase.

And just my last question is just in regards to the HCP Ventas lawsuit. Jay Flaherty has said, both in August and on his recent call, that the litigation has been expensive and distracting and that they would prefer to settle the matter if reasonably possible. And I am just curious -- are you in settlement negotiations or has a settlement amount been proposed to you to resolve the matter or are you just progressing forth to the court case in February of next year?

Well, a couple things. We did receive the $102.8 million compensatory award, as Rick pointed out, in the third quarter. The punitive damage trial has been set for February 21, 2012 in the Louisville Federal Court. HCP has filed a petition for the Supreme Court to hear its case and they filed that on October 25 of this year and we have obviously opposed that petition. And finally, beyond that, I think I just wouldn't comment other than to say that we have never been offered any amount to be paid for the HCP litigation from HCP.

All right. Thank you.

Jerry Doctrow, Stifel Nicolaus.

Thanks. Just to start, maybe I guess this is a Rick question, a little more color on sort of the non-cash items. And you talked about them burning off, but any sense of what that tail looks like because it does move the numbers a lot?

Yes, it does and this -- I think this is a really important aspect of our earnings and we are really endeavoring to be excessively transparent, if you will, in the way that we have reported this quarter's earnings. And I do think that is a value that we have and something that we consider to be important.

Let me give you some -- so again, just to repeat, our earnings, our normalized FFO earnings are $0.88 a share. That is fantastic, 20% plus year-over-year growth. What we have done is tried to call out that there is about $0.06 in there that is kind of non-cash, GAAP-required earnings and then even if you took all of that out, which, by the way, most companies have some non-cash earnings in their normalized FFO, so that is why I mean we are being excessively conservative and transparent in the way that we reported it.

But the kinds of things those are will burn off at various times. To the extent they relate to a lease, Jerry, they will extend over the whole lease term. The best example I can give you is really on the interest side. If we took over an NHP senior note say and say that senior note was a 10-year note at 7.5%, but it matures say next year, we would have to book the interest expense at the one-year rate of Ventas' borrowing rate. So that is a pickup in earnings. Now when we go to refinance that and we do a great job and say we get 4.5% or whatever, our cash results will be better, but the way GAAP books it, our GAAP results will be a little bit worse on that particular component.

So it gets a little complicated. It depends on the various lines, but what we expect to see, and the reason in part we are calling this out is that we would expect to see the cash portion going up and the non-cash portion tailing off over time depending on what the various non-cash items are. So hopefully, in an effort to be transparent, we haven't really confused you.

Well, you probably have, but it may just be (multiple speakers).

Okay. GAAP is very confusing, I would say.

And it is not like one nice neat item. It is basically spread in a bunch of different places.

It is. Yes, it is. And it is really a function of doing a lot of acquisitions and what the purchase accounting rules are.

And just sort of optically, I don't know if you have this or maybe you can do it when you do fourth-quarter guidance for next year. So optically, if we think about that $0.06 a quarter, obviously, it continues into 4Q.

Yes.

Burn-off, if we think about it just through 2012, is there any material burn-off through 2012 or I should think that $0.06 just stays with me?

We will get into -- that is a good suggestion that we can provide more on when we report the fourth quarter, but for now it is probably as good as anything else to carry that on.

Okay. And then just a couple of other things if I could. Just for you on the dividend, I mean obviously you have got these great earnings growth. I think you had calculated with the non-cash a 65% payout ratio, which is wonderful. I mean how are you thinking about dividend? Maybe is the ratio to FAD or FFO or should we be thinking of more growth on the dividend side?

Well, a couple principles that we will state and some past practice. We believe that dividend growth is an important part of delivering total shareholder return, which obviously is the holy grail for us. We've had about an 8% dividend CAGR on the Ventas dividend for the last four or five years. We typically do look at the dividend that is in the first quarter of the year and we will look at both FFO payout ratio and again, right now, that is about a 65%, very, very strong, well-covered dividend and we will look at -- we will look at it in relation to cash flow as well. But I think Ventas is -- again, this is a very important investment attribute of Ventas, which is the prospect of dividend growth, the history of and the prospect of future dividend growth.

Okay. And so based on what you are saying, I am assuming that, in first quarter, we will get a dividend increase and we may need to think about it more on a cash basis than with this non-cash stuff?

It's both. I mean I think you look at FFO coverage and you look at cash as well and you triangulate to a good outcome that in the past has been very positive for shareholders. So hopefully, we will be able to continue that in the future.

All right. Last thing from me. Obviously, all the Medicare stuff, I don't necessarily want a whole rehash of lease coverage, but are there any items in your portfolio or properties in the portfolio either with the Kindred or with some of the smaller operators where you expect either lease terminations on maturity or renegotiations? Is there going to be any noise as we get into kind of fourth quarter, first quarter because of the Medicare rate stuff?

As I said in my remarks, I mean even with a 13% cut in Medicare reimbursement and a 25% mitigation, we would be at 1.7 times across the portfolio. That is consistent between our Kindred and NHP assets generally. So we have got a large diversified portfolio with a number of operators in it. There is nothing material that we would anticipate in the fourth or the first quarter that would arise as a result of the announced cuts in reimbursement.

All right, thanks. That's all for me.

Yana Galan, Bank of America-Merrill Lynch.

Thank you. Good morning. As you are evaluating your acquisition pipeline, I was curious how you think about balancing the triple net exposure versus MOBs and then the senior housing operating.

Thanks for joining. When we look at our portfolio right now, the combination of the NHP and Atria transactions did a number of things for us. It decreased our triple net lease exposure to currently 61% on an NOI basis and it increased our senior housing operating assets to about 25% of the total portfolio. And I think because we are in a very good part of the cycle on seniors housing with low construction and growing demand, I would guess that that part of our portfolio is generally going to be in the 25% to 33% range over time.

I would again emphasize though that it is not so much the percentage that we care about, it is the kind of assets, operators and markets that we are having in that operating portfolio because we really have, with Atria and Sunrise, as you know, the best markets, best physical plants and the best operators in that operating portfolio.

And as a result, and you can see this from some of the trends, that we believe that has more upside and a more protected downside. And so when you have operating assets, that is really how we think about it. But again, we would expect that to be between sort of 25% and a third.

And then on the triple net lease side, again, with the NHP and Atria transactions, that part of our business is 61% now, down from 68% previously. The triple net leases give us a good year-over-year kind of growth rate in good times and in bad and we would expect that to continue to be a significant portion of our portfolio. Maybe it will shrink a little bit over time, but it is an important part of our business and will continue to be so going forward.

Thank you. And then are you comfortable underwriting skilled nursing acquisitions at this time or is that an asset class you will probably stay away from in the near term?

Well, I mean we -- having been here for 12 years, I think we really understand the skilled nursing business. I would say that there are some positives about the skilled nursing business. It is a low-cost provider, which is an important part of the long-term sort of healthcare delivery system to seniors. And we think, in the right time in the cycle at the right price and the right structure, that it is a valid part of someone's portfolio. I think I will defer to Ray in terms of what you can expect from us going forward.

I would just echo what Debbie is saying. We think it is an important part of the healthcare continuum. It is a low-cost provider. It is going to be going forward an important part of the healthcare system. So we will continue to have an interest in owning skilled nursing buildings.

That all having been said, there is not a lot of activity in the marketplace right now. I think people are very internally focused on making sure that they mitigate -- that they focus their efforts on mitigating the cuts, that they are working on their operations rather than thinking about monetizing their portfolio in a relatively less certain environment. So I don't think we are going to see a lot near term.

That being said, as this plays out, there may actually be some good buying opportunities and we are going to keep our eyes peeled for that.

Great. Thank you very much, Ray. Thanks, Debbie.

Rich Anderson, BMO Capital Markets.

Thanks. Good morning. Can we talk about the rent reset from Kindred and when -- I think it is 2013 -- that things start to expire. Is that correct? Re-expire?

Well, you are right. There is a portion of the Kindred portfolio that is up for renewal in May of 2013 and some of that has a reset right in it in Ventas' favor.

Okay, so where would you say -- you said in Ventas' favor, but where would you say rents are in light of CMS or anything else where rents are relative to market today?

So the assets that are up for renewal with Kindred in 2013, it is about 9% of our total NOI and it is currently covering EBITDARM about 2.1 times, so very, very strong coverage. So with sort of you can call it a 15% reduction on the Medicare side and maybe a third of mitigation or something like that, gets you back to about a 10% impact. It is still covering quite well. There is about 40% hospitals in there, which has received an increase in Medicare reimbursement recently and about 60% skilled nursing. So net net, I would say about market rents for that portfolio, it is a profitable group of assets even after changes, known changes in reimbursement.

Okay. Just getting back to the non-cash element to your FFO, was there any thought to not having that normalized FFO so that we weren't having this conversation?

Well, --

Or a portion of it?

I mean the answer is no because this is really normal -- I mean it is really normal FFO and as I said, most companies have a significant amount of kind of non-cash items if you look at their cash flow statements in their regular FFO and we do too. It just happens that because of the volume of the acquisition activity, we happen to have a bunch and so we tried to call it out for you.

Again, I know the REIT analysts are always trying to make a better FFO or make a better FAD or what have you, but I really like the cash flow statement because that is a GAAP statement and you can look at it. It is apples-to-apples pretty much for everyone. So it is normal FFO; it is just we are trying to make it again conservative and very transparent for you.

When you underwent that purchase accounting change, as you described it, did this non-cash income -- I know there is several kind of parts of it, but did it come from someplace else? In other words it was maybe viewed as cash and now it is non-cash or something like that?

No. No, no. And in fact, that is why our guidance is going up and it is going up more than the non-cash items because we typically underwrite on a cash basis obviously because that is what we care about. And so that -- the cash part is coming in better than we expected and then the non-cash part is an add-on on top of that, if you will.

Okay. And then -- okay, that's fine. And then last question is the element of your increase that was kind of outperformance, as I think Rick described it, you had in-line Sunrise, in-line Atria. Where did it come from? Was it from the NHP portfolio or was it kind of all over the place?

It is all over the place, a little bit from NHP, a little bit from better cash interest expense, etc. Better capital cost, lower deal costs, that sort of thing.

Okay, thank you very much.

Karin Ford, KeyBanc Capital Markets.

Hi, good morning. Sorry to beat a dead horse on the non-cash, but you said you underwrite to a --

I am a live horse. Keep going.

Thanks. When you quoted your pricing on NHP back at the time of the acquisition, I think it was like an 18 times FFO multiple, that does not include -- that was a cash basis, right? That does not include this non-cash income?

Essentially yes.

Okay. And is there a breakout of how much of the $0.06 is specifically NHP purchase accounting-related or is that all in there?

It is everything. Yes.

Okay just a question on the operating senior housing on page 13, it looks like the Sunrise portfolio saw same-store expenses grow on a year-over-year basis and sequentially sets up margins came down despite the occupancy increase. Can you just talk about what types of expense pressures you are seeing in the portfolio?

Right. So I think year over year if you adjust for the $2 million cash payment and equalize the management fees, the margins were actually spot on at 33.8%. Sequentially they were down 40 basis points and that relates mostly to utilities and a little bit of hurricane expense in there.

Got it. Okay. And then a final question I guess there was a recent 20% cut in Medicaid payments in the State of California. I know you guys don't have -- you have some properties there, some SNFs, some hospitals. Do you expect it to have a significant impact on your portfolio and your coverage in anyway?

We have got nine nursing homes in California and there really wasn't a Medicaid cut. Let me just clarify what happened and that is there was a 10% deferral of Medi-Cal payments so it is a deferral. It is not a reduction in the rate and it is 10%. So we feel fine about it. We have nine nursing homes there and the hospitals really aren't Medi-Cal, it is not a material portion of the hospital business.

Okay, thanks very much.

James Milam, Sandler O'Neill.

Hey, good morning guys. Sorry to do this as well. The $0.06 -- none of that.

Let's talk about the $0.82 to $0.88.

Hopefully this is quick. But that doesn't include any straight-line rent?

Yes, it does. It is basically the non-cash earnings so it is the sum of all of them.

Okay, so some of that is in there. Okay, great. The next one just on a same-store MOBs, I know that that portfolio is going to shift the mix over time but just looking at the same-store NOI, it has been declining for a few quarters now. Can you just talk about the leasing environment and what the rental rates are in that and when you expect that to move the other direction?

Actually, James, the cash NOI and the same-store MOBs was up slightly year over year and as I mentioned in my remarks and I think when you look at the trends, the leasing activity is actually pretty good. Our portfolio at 93.5% occupied is certainly above industry averages. We are seeing a great retention rate at 84%. We are starting to see leasing activity pick up I think in our portfolio. So we think the portfolio is performing pretty well.

Okay, I am just looking -- it looks like it is 12 and 12.3 year-over-year on NOI.

Again, same-store NOI cash is up 2.6% kind of year-over-year and that is what --

On the total portfolio, including our consolidated and unconsolidated, so you are looking at just the consolidated there and that also is a different pool of non-stabilized assets in one period to the next. So it is not easy to divine from the growth.

I'm glad you said that because that is obviously why I am asking the question, so that makes me feel better. Can you guys just -- on the line of credit, it sounds like there is about $450 million outstanding now. Is that right?

Well, we have about $750 million outstanding -- we have $1.8 billion of available liquidity. We have about $750 million outstanding on the line and we have the term loan, as well that has $550 million of availability.

Okay. And then the debt -- the interest rate on the acquisitions, the debt that you assumed, was that around 6% or so?

The $37.7 million on the $150 million of acquisitions?

Yes.

It is in the 6%s.

Okay, great. And then just the last one, on the integration costs and expense G&A savings, of the $15 million that you expect to receive or to earn, excuse me, how much of that have you guys already cut out of the G&A line?

I mean we are -- a lot of it, but we will continue to try to make efforts to wring the benefits out of the NHP transaction.

Okay, thank you.

Brian Sekino, Barclays Capital.

Thanks a lot. Good morning. Just to follow up on the development opportunities for the MOBs, with Lillibridge under your belt for a year and the $1 billion of the PMB development pipeline, can you kind of tell us what the hurdles are to ramping that up given the extra yield that you do get from development?

I mean there really aren't any hurdles internally to ramping that up. It is really the market activity, which has been accelerating, as I mentioned in my opening remarks. I mean Lillibridge has its development capabilities and PMB has internal development capabilities, which are scalable from their current levels. So we feel pretty good that we are going to be well-positioned to field the opportunities as they accelerate.

And so just a function of more of a pool business and seeing the opportunities in the market accelerate is what you will see, is what will get you to up your development?

Yes, and we have been seeing an increase in the number of RFPs that are coming across our desk, I mean requests for proposals that have been coming across our desk. And so if that trend continues, hopefully, we will see continued growth in our development pipeline.

Perfect. Thanks a lot.

[Jess Pollard], Green Street Advisors.

Good morning. You have talked about the 25% mitigation number for Medicaid reimbursements a couple times now and I was just curious about how you came up with that number, what kind of confidence you have in that estimate and whether you think that would be different for the Kindred portfolio versus some of the legacy NHP assets.

Well, it is a very high-level analysis. I think that you can see from the public operators what their comments are. I think many of them have stated they expect 50%, 5-0 percent mitigation. So we are taking I think a measured approach in terms of what we think the operators can do in overhead costs and technology improvements for example.

What I think about the difference between the public operators and I won't speak for any one of them, they speak for themselves. First is though the smaller local and regional operators is that the negative impact on the larger national operators of the cuts will be on the higher end because they have therapy businesses, they were really getting the benefit of the full RUGs for improvements, and so the impacts on them will be greater and they will have a greater mitigation sort of necessity, if you will.

On the local and regional operators, it is a bit of a different story. They did not get as much of a benefit from the Medicare RUG-4. They don't by and large have the therapy businesses. So the reduction in rate to them will be at the lower end and they will have less mitigation effectively to do. So it is a little bit of a different story for both of those kinds of portfolios again depending on your business model, your quality mix, etc.

Okay, great. I think that makes a lot of sense. Thank you.

[Derek Boller], UBS.

Hi, it's Ross Nussbaum here with Derek. First question, do you have any acquisitions in your fourth-quarter guidance?

No, no.

Second question, and I'm going to continue to beat the dead horse. Could I make a huge suggestion? Could you guys post a schedule to your website that breaks out that non-cash $0.06 adjustment in terms of what is in there from a gross basis, on a gross dollar basis, as well as a per-share basis because I think --

Yes, it is in the cash flow statement and that is already posted. There is only one wrinkle, so I mean I can just tell you right now it is four lines and then $900,000 on another line. But yes, we will be happy to point you there or post something.

Because that is where I wanted to go because I have spent a lot of the time on the call sort of trying to go through those numbers and I am coming up with $5.5 million of straight-line rent, $10 million of FAS 141, $9.5 million of debt amo. So I think that is part of the issue is everybody is sort of struggling to get those numbers from the cash flow statement and understand exactly what they are.

Okay, so just, everyone, just so you don't struggle, it is amortization of deferred revenue and lease intangibles, other non-cash amortization, stock-based comp, straight-lining of rental income net and then $900,000 of below-market ground lease, which is in the other line. And that line is 1315. So again, it is intended to be transparent. It is right there on the GAAP statement other than the ground rent and --

And the change in value of financial instruments? Is that one of the adjustments?

It is not because that is not in normalized FFO.

Okay. Because I think the other struggle that some of us are having here is your definition of normalized FFO has perhaps gone one step beyond what other REITs typically do with the exclusion of some of these items. So I think that is part of the struggle as well in trying to understand how you are defining it versus how we typically define it.

I think, for example, we have excluded from normalized FFO the proceeds of the litigation award, etc. again because we had $11 billion in transactions, we have excluded deal costs, etc. So I can understand that we need to spend some more time walking everyone through it. But again, the purpose of just putting everything in a bucket there for you was to make it easier and I can see that we need to do -- we need to spend some more time with people just to further clarify.

I think the bottom line again is $0.88 versus $0.73, fantastic. Many companies would have all of that in their normalized FFO. Take it all out if you like, it is $0.82, it is over 12% growth and we are extremely happy with our performance.

I will follow-up with you after the call.

Omotayo Okusanya, Jefferies.

Yes, good afternoon. A couple of quick questions. The same-store numbers for the Atria and Sunrise portfolio, page 13 of the supplemental, I am just trying to figure out same-store NOI growth that actually occurred in each of these portfolios on a year-over-year basis if you could help me with that.

Right. Well, since we didn't own the Atria portfolio last year, obviously we don't include it in our same-store and so that is why you can't see it on page 11 or on 13. I would say that Ray talked about Atria as we have from the beginning being in high single digits, year-over-year NOI growth and right in line with our expectations and then you have Sunrise there.

And if I just look at the Sunrise piece, I back out the $2 million from 3Q '10, am I really looking at the 7.5% type growth?

Well, you have to normalize the management fee, which would go in the other direction and it is really more like 5.6%.

Okay.

Is that helpful?

Yes, that's definitely helpful. And then second question, the page 5 of the disclosures and the lease rollovers, I understand the situation. You are looking at 2013 where you have a decent amount of rollover. We have talked a little bit about the Kindred piece. Could you talk a little bit about the hospital piece and what is going on there?

Yes, that is what I referred to when we talked about the 2013 Kindred branch, which in total is about 9% of our NOI and of that, about 40% is the hospitals and 60% is the nursing homes. So that's (multiple speakers). Okay?

Okay. Helpful. And then I am not going to go into the whole normalized FFO; that is definitely an off-line conversation. But on the MOB side, just going back to Mr. Milam's question, what are the trends there in regards to just mark-to-market? Could you talk a little bit about what you are seeing in regards -- it sounds like many of your other peers are just starting to see mark-to-market trends slow down somewhat. And I am just curious what you are seeing and if you are kind of seeing anything, any particular regions kind of across the portfolio as a general trend in regards to lease rates?

Yes, this is Todd. I think, overall, it varies, as you said, market by market. We are seeing in our secondary and tertiary markets, we are able to push rents. Those are markets that are anywhere from St. Louis to Indianapolis, Austin, Columbus, Ohio. In the primary markets such as Chicago, Atlanta, we have difficulty in terms of pushing rents. The rest of the market we find stability.

As Ray had mentioned, we are seeing some very strong leasing activity again being driven by not only the industry consolidation, but the employment of physicians and we are the recipient obviously of the continued trend towards outpatient. So from that standpoint, leasing activity continues to build the momentum up.

Keep in mind the employment rage. We are just starting to see that as a result of a lot of activity in 2010. So we are optimistic about the activity and we think that again translates into increased occupancy. But it is market-to-market and I think we are going to continue to see that over time with varied supply.

That's helpful. Thank you very much.

Jerry Doctrow, Stifel Nicolaus.

Hi, thanks. The one thing I want to do is to ask as a follow-up was on the Atria properties, you have these ones that were owned by NHP that I think you're going to move into the RIDEA structure, if I remember and I was just curious about sort of that process and timing because it may move the numbers a little bit.

Yes, I mean this is another fun one for you, so buckle your seatbelt. Essentially the way this worked is those assets went on our balance sheet and were owned and were managed and owned by us on our balance sheet and managed by Atria when we acquired Atria. When we merged with NHP, we eliminated a liability of a couple hundred million dollars, so it was already on our balance sheet as an owned item. Atria was managing it and everything sort of got collapsed when we then closed NHP. So it is very straightforward now, but there were various steps along the way.

All right, ladies and gentlemen, that will conclude the question-and-answer portion for today's event. I would now like to turn it back over to Ms. Debra Cafaro for closing remarks.

Okay. Well, I want to -- on behalf of all of my colleagues, I want to thank you again for joining us today. We really appreciate your interest in the Company and your support of the Company. We will be happy to spend some more time with you on any of the detailed results, but we are again very pleased with where we are and we look forward to seeing everyone at NAREIT and take care. Thank you. Have a good weekend.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a wonderful day.