芬塔 (VTR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Ventas earnings conference call. My name is Keith, and I will be your Operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Lori Wittman, Vice President, Capital Markets.

Thank you. Good morning, and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the quarter ended March 31, 2012. 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 actual results may differ materially from the Company's expectations, whether express or implied. We refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2011, 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 to you 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 the quantitative reconciliation 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, Lori, and good morning to all of our shareholders and other participants. And welcome to Ventas's first-quarter 2012 earnings call. Today I will be pleased to share an overview of our outstanding first-quarter results. Ray Lewis will discuss our portfolio and investment activities, and Rick Schweinhart will review our financial results in detail. After our remarks, we will be happy to take your questions. Before we get into earnings I thought we should reflect on Ventas's transformation. For over a decade, we have been clear about our goal to deliver consistent, superior, total shareholder return.

We have also been consistent about how to create value for stakeholders; grow the Company; increase earnings from internal and external sources; diversify our portfolio, our asset mix, and our tenant operator base; focus on increasing the private pay portion of our business; pay a secure and growing dividend; and maintain a strong balance sheet and financial flexibility. Our 10-year performance has validated this approach, with compound annual total shareholder return exceeding 22% during that period. And just a few data points demonstrate the incredible movement we have made on our objectives in the last year.

A year ago, we hadn't yet acquired Atria or NHP, our enterprise value slightly exceeded $11 billion, and we owned 602 assets. Now we own over 1,400 diversified assets and have an enterprise value of $24 billion. Then, our largest tenant accounted for 36% of our NOI, but now represents only 17%. A year ago, our private pay revenues represented 73% of our business, and now they have grown dramatically to 80%. Even more importantly, we have expanded our base of tenant operators by four times, to over 100 existing relationships, adding high-quality assets and operating partners such as Atria Senior Living and West Coast MOB developer Pacific Medical to our portfolio.

As we have grown, we have also actively managed risk. First, our diversification by asset type, operator, and business model positions us to perform in a variety of economic cycles, reimbursement regimes, and capital markets environments, and increases our reliability and stability, regardless of any single event, tenant, or trend. Second, our increased size and scale have allowed us to enhance our liquidity, balance sheet, and our cost to capital. Since last year, our unsecured line has doubled in size, and pricing has improved by over 170 basis points. Our recent bond issuances continue our trend of improving our cost to capital.

Twice already this year, we took advantage of our positive credit momentum and strength in the bond market to raise a total of $1.2 billion, at an average interest rate just above 4% for 8.5 years. With our new head of Capital Markets Lori Wittman leading our efforts, I am confident we can accelerate progress on this front. With all the change Ventas has experienced, a few things have remained constant -- those include our commitment to stakeholders, to rigorous execution, and to acting with integrity. We also continue to enjoy the benefits of demographic demand from the growing over-85 and baby boomer population, as well as the opportunities embedded in a large, fragmented, $1 trillion healthcare real estate sector.

And we have an incredible group of professionals at Ventas, both non-tenured and new additions, who continue to work tirelessly as a team for our constituents. They go all out every day to keep performance on track, identify and solve problems quickly, integrate our acquisitions, maximize the value of our assets, optimize our balance sheet, build and capitalize on our acquisition pipeline, and capture the full potential of our expanded platform. Our results show it -- this quarter, our normalized FFO grew 21% per share over last year, to $0.91. Atria and Sunrise were big contributors, as were improved interest rates. This quarter, our dividend increased 8%, while at the same time our payout ratio in 2012 improved considerably. Our debt-to-enterprise value of 28% at quarter-end is industry-leading.

We intend to use this momentum to continue delivering excellent results. Ventas' normalized FFO guidance for the year, which included the Cogdell acquisition, represents almost 9% per-share growth at the midpoint. The excellent acquisition of 72 high-quality MOBs from Cogdell Spencer in the second quarter should produce annualized accretion of between $0.03 and $0.05 a share, or call it about $0.03 at the midpoint, for the balance of 2012. This expected accretion was already included in our full-year guidance.

We welcome our new Cogdell Spencer employees to Ventas, and thank them and our Ventas Lillibridge colleagues for their work in accelerating the integration of our companies. HR, IT, accounting, and asset management have been exceptional in making the transition smooth. Finally, earlier this month, we were pleased to announce the acquisition of 16 Sunrise communities. Given the strong results in our existing Sunrise portfolio and the confidence we have in Sunrise's operating team, we are looking forward to blending these communities into our portfolio. Now, I will turn the call over to Ray.

Thanks, Debbie. During the first quarter of 2012, our portfolio turned in another solid performance. Our same-store portfolio of 535 assets provided 3.5% cash flow growth over the first quarter of 2011; and over 5%, if you normalize for the increase in the Sunrise management fee, which I will discuss in a moment. So, today, I would like to share with you how our strategic growth and diversification strategy continues to deliver results, whether it is a stable cash flows of our triple-net lease portfolio and MOBs, or our higher-growth, private pay, seniors housing operating assets.

First, I will briefly cover the performance of our triple-net lease portfolio, which accounts for over 60% of Ventas's annualized NOI and is diversified across nearly 900 seniors housing, skilled nursing, and hospital assets. This is the bedrock of Ventas's portfolio, and provides us with stable and growing cash flows through the annual rent escalations in our long-term master lease contracts, which feature credit and structural support. And the performance shows -- same-store cash NOI growth for the first quarter of 2012, compared to the first quarter of 2011, in our 384 same-store, triple-net properties was 2.6%, consistent with our projections at the beginning of the year of greater than 2.5%. Cash flow coverage for the fourth quarter of 2011 in our same-store, triple-net lease portfolio was a strong 1.7 times, and our Kindred coverages remained at 2.1 times.

Next I would like to discuss our seniors housing operating portfolio, which consists of 198 high-quality independent and assisted living communities managed by Sunrise and Atria, and accounts for 26% of our NOI. This portfolio had an outstanding first quarter, with positive sequential increases in occupancy, NOI, and margin. These best-in-class properties are hitting on all cylinders and delivering above-average NOI growth. NOI before management fees for the total portfolio increased 3.9% sequentially for the first quarter, to $105.9 million, compared to the fourth quarter of 2011. And NOI after management fees was $90.4 million, up about 1% sequentially.

As a reminder, our Sunrise management fee reverted to 6% of revenues for the first quarter of 2012, up from the 3.75% reduced rate that we had negotiated for 2011. Same-store stabilized unit occupancy continued its upward trend by increasing 20 basis points sequentially, to 89.1%. This is particularly notable, since seniors housing occupancy typically declines during the first quarter. Our Sunrise portfolio of 79 high-end, mansion-style seniors housing communities generated NOI of $38.8 million in the first quarter of 2012 -- an increase of 6.8% over the prior year and 14.2% pre-management fee.

Resident occupancy increased 190 basis points year over year and 20 basis point sequentially, and finished the first quarter at 91.6% -- another record for the Sunrise portfolio. Operating performance in our Atria managed portfolio of 119 private pay seniors housing communities were similarly strong. Total NOI was $51.7 million for the first quarter, a sequential increase of 6.6% over the fourth quarter of 2011, driven primarily by annual rate increases which took effect in January, lower expenses, and a full quarter of results from a property acquired in the fourth quarter.

Ventas and Atria continue to execute on our redevelopment strategy, as two new projects were approved and will begin construction in the second quarter, and one recently opened property was acquired and added to the lease-up portfolio. Performance in the eight properties in our same-store lease-up portfolio continues to be strong, as occupancy increased 180 basis points from the fourth quarter of last year. Though the first quarter showed stronger occupancy than the fourth, the first time this has occurred, and we are pleased with the results during the first quarter.

However, there are certain moderating factors that we are mindful of. For instance, there is typically a seasonal decline in occupancy during the second quarter. In addition, certain expenses were unusually low during the first quarter of this year, and we are expecting those to revert to more normal levels for the balance of the year. But make no mistake -- our seniors housing portfolio is performing strongly, and our Company is significantly benefiting from these best-in-class assets in major markets, with pricing power and excellent management teams who are driving performance.

Before I turn to acquisitions, I would like to discuss the Ventas MOB portfolio. The big news in the first quarter was the closing of the Cogdell Spencer acquisition. This $760 million purchase of 72 billings, largely in the Carolinas, added over 4.2 million square feet of high-quality, majority on campus MOBs, and another 2 million square feet of third-party property management. With the closing of Cogdell, we are now the largest operator of MOBs in the country, with over 21 million square feet owned and managed, and medical office buildings now account for approximately 15% of our annualized NOI. Through the first quarter of 2012, the performance of the Cogdell portfolio is right in line with our expectations; and at end of the first quarter, the stabilized consolidated Cogdell portfolio was over 92% occupied. Moreover, the merger integration is ahead of schedule and nearly complete.

Shifting quickly to the Ventas portfolio -- cash NOI in the 177 MOBs in our same-store portfolio increased 2.3% sequentially from the fourth quarter of 2011 to the first quarter of 2012, driven primarily by increases in rate and expense controls, offset by a slight decrease in occupancy. Total leasing activity started to accelerate in the first quarter of 2012, with a backlog at the end of the quarter of approximately 219,000 square feet of leasing activity, versus 194,000 square feet at the end of fourth quarter of 2011 -- an increase of 12%.

So, our medical office business continues to provide steady performance; and with the addition of Cogdell, a further diversification of our national platform and relationships with leading healthcare systems across the country that position us to continue to consolidate and grow in this attractive space. Finally, before I turn the call over to Rick Schweinhart, I would like to spend a moment on the investment environment. Our total acquisition volume already exceeds $1.1 billion this year, including Cogdell and our recently announced acquisition of 16 private pay, [purpose filled] communities managed by Sunrise.

The Sunrise transaction is a perfect illustration of our investment strategy for seniors housing operating assets -- the best assets in the best markets with the best operator. We believe that these high-quality, newly constructed assisted living and Alzheimer's assets can provide a superior risk-adjusted return over time. The purchase price was just under 7% cap rate on 2012 NOI. And if we can achieve a 5% annual growth rate in NOI -- a reasonable assumption for assets of this quality with a good operator like Sunrise, we should be able to achieve an average annual cash flow yield on our investment, after CapEx, of 8% over 10 years. So, this is a very attractive return for this quality of asset in today's investment environment.

Looking at the external environment, the acquisitions pipeline remains strong, with significant activity in both the seniors housing and the MOB spaces; and we are seeing a consistent proprietary deal flow from our existing tenant relationships. We are off to a strong start on the acquisitions front, and expect to be able to continue to find more attractive investment opportunities as the year progresses. With that, I will turn the call over to Rick Schweinhart, who will discuss our financial results. Rick?

Thank you, Ray. The following significant events occurred in the first quarter -- in February, we issued $600 million of 4.25% senior notes. The proceeds were used to pay down our revolver, and in effect, prefund our acquisition of Cogdell Spencer. In February, we sold nine senior housing assets for approximately $120 million, producing a gain of $55 million, $15 million of which was deferred. In the quarter, we purchased a senior housing community and a medical office building for $56 million, assuming debt of $17 million.

In February, we repaid over $75 million of secured debt with an interest rate of approximately LIBOR plus 250, due in 2012 and 2013, and borrowed $60 million of secured debt at L plus 150, with a 2016 maturity. In the quarter, we called our 6.5% senior notes due 2016, incurring a loss on early extinguishment of $29.7 million, which included a cash penalty of $6.5 million and a non-cash discount write-off of the difference. Our revolver balance at quarter-end was $73 million. After quarter-end, on April 2, we acquired Cogdell Spencer for about $760 million.

This consisted of approximately $250 million for the equity, repaying preferred stock and debt of $330 million, and assuming the remaining secured debt. In April, we issued $600 million of 4% senior notes. This effectively prefunded the Sunrise acquisition plus the repayment of our 6.75% senior notes due 2017, which will occur next month. Currently, we have cash of $25 million, $70 million outstanding on the revolver, and over $1.9 billion of capacity available. Our total current debt outstanding after the Cogdell acquisition is approximately $7.2 billion, and our pro forma net debt to EBITDA is about 5.1 times.

Now, let me focus on first-quarter results. First-quarter 2012 normalized FFO was $0.91 per diluted share -- an increase of 21%, compared to the first quarter of 2011 per-share results of $0.75. Normalized FFO increased 118% to $263 million, compared to last year's first quarter of $121 million. We have detailed the non-cash items included in normalized FFO on page 19 of the supplemental. Normalized FFO in the first quarter excludes the net expense totaling $9 million from the loss on extinguishment of debt, merger-related expenses and deal and integration cost, non-cash income tax expense, mark-to-market adjustment for derivatives, and amortization of other intangibles, partially offset by the gain on the sale of real estate assets.

First-quarter normalized FFO increased from last year's first 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 $209.5 million from $116.6 million last year, primarily due to the acquisition of Nationwide Health Properties, and also due to contractual escalations. Senior housing operating NOI increased $54 million, principally due to the Atria acquisition. First-quarter medical office building NOI grew to $46.5 million from $18.4 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 $8 million this year from $6 million last year, due to the NHP portfolio.

On the expense side, consolidated interest expense increased to $71 million this quarter from $41.7 million last year, reflecting the assumed debt due to the Atria and NHP acquisitions, as well as all the debt activity in the last four quarters. Our average cash interest rate improved to 4.9%, from 5.3% last year. Looking at sequential results -- normalized FFO increased $4.5 million to this quarter's $269 million, primarily due to first-quarter increases in all three of our segments, partially offset by a reduction in interest income on loans receivable due to fourth- and first-quarter payoffs.

Interest expense increased $600,000 in the first quarter compared to the fourth quarter, principally due to the issuance of $600 million of 4.25% senior notes early in the quarter, offset by the repayment of $200 million of 6.5% senior notes late in the quarter. We continue to focus on maintaining a strong balance sheet and increasing cash flows from operations. Net debt provided by operating activities from the statement of cash flow increased 87%, to $245 million for the first quarter, from $131 million last year. At March 31, our credit stats were outstanding, with net debt to pro forma EBITDA at 4.7 times, our fixed charge coverage ratio in excess of four times, and debt-to-enterprise value of 28%.

Our current debt ratings are -- S&P at BBB stable, Moody's at Baa2 stable, & Fitch at BBB+ stable. We continue to operate the business in a way that should justify continued movement up the credit curve. Weighted average shares outstanding in the quarter were 291 million shares, flat compared to the fourth quarter of last year, and up 80% compared to the first quarter of last year. We are confirming our 2012 normalized FFO per diluted share guidance at $3.63 to $3.69. Guidance does not include the impact of additional capital transactions or any acquisitions other than Cogdell.

Thanks, Rick. Before we go to Q&A, a couple things -- one is a clarification on one thing that Rick said -- it was net cash provided by operating activities from the statement of cash flows increased 87% to $245 million in the first quarter, from $131 million last year. And then, the second thing is, I do want to add a comment on our 2013 Kindred renewals. I know many of you have some questions about that. So, as expected, Kindred has now renewed officially three renewal groups of the 2013 renewal assets, for a total of 25 assets and $46 million of annual current rent. So, we expect to release the other 64 assets comprising $77 million of annual rent, or about 5% of our NOI.

We have gotten over 100 unsolicited inbound calls from companies expressing interest in these properties, and we have developed a comprehensive plan for re-leasing, and we expect to launch that process in the second quarter. So, just a reminder -- these 64 licensed healthcare assets are profitable. We believe that current rent on them is about market, and we are very confident that the assets will be attractive to a wide variety of quality healthcare providers, and look forward to executing on the leasing plan and bringing you all up to date in the coming months. So, Operator, we will be happy to open the floor to our investors' and analysts' questions.

(Operator Instructions) Michael Bilerman, Citi.

It's Quentin here with Michael. Just sticking with the Kindred assets firstly -- once you have moved to re-leasing those assets, and given that your private pay portion of the portfolio is moving above 80%, I'm just wondering whether you would investigate selling out of that side of the business as you focus more on seniors housing and medical office?

We are very focused on maximizing the value of these assets. And while we would consider, potentially, selected sales, our real focus is on re-leasing the assets to qualified healthcare providers. And that is the path that we are going down.

Is there some point in the future, once you -- you get them released that you would investigate -- that you would think about selling them? Or are you comfortable having the nursing exposure, and are you comfortable with the reimbursement risk?

Well, what we believe is, it's all about balance and diversification. And we think that skilled nursing assets have an important place in the healthcare delivery system. And so, we believe in the asset class. I will tell you that now that we have over 1,400 assets, I think we will be more active capital recyclers and more rigorous in our disposition strategy and methodology. But overall, I think that it's all about balance in the portfolio, and skilled nursing assets are an important part of the healthcare delivery system to seniors. And so, we are not contemplating a wholesale exit from the business. And just to repeat, we do intend to go down the path of re-leasing these 64 assets.

Thank you.

Jana Galan, Bank of America.

Also following up on the Kindred leases -- how does, given Kindred's change in strategy, how are you thinking about that next bundle of leases that you have expiring in 2014?

Actually, those go through 2015, just to be clear. And look, I think that we will be happy to address that once we release the 64, and happy to do that. I think right now we are focused on having an excellent execution around our re-leasing project. And these are good assets and they are profitable, and we look forward to a good outcome.

And then, just as you are reviewing the deal pipeline out there, would the recent CMS proposals make you feel more comfortable about the public pay asset exposure? Or it would be kind of like where you are now, at the 80% private pay?

Well, certainly the focus of our investment activities has been on the private pay side. And that has been, as Ray pointed out, really great for our Company. I think you are discussing, really, the CMS preliminary rule that came out regarding long-term acute care hospitals earlier this week. And that was a rule that had an uptick in spending for 2013 of about 1.9%. And that proposed rule is subject to a 60-day comment period, and was at the -- at the more positive end of our expectations for the 2013 Medicare reimbursement for LTACs. And we were particularly pleased that CMS really endorsed the LTAC model in its proposed rule, and the rule may stay as it is or even get a little bit better in its final form. But it -- again, it certainly is a positive development for our LTACs in general and for the re-leasing projects.

Great. Thank you very much.

Brian Sekino, Barclays.

Just wanted to -- quick question on the guidance -- you said it doesn't include the Sunrise acquisition. Is that right? But it includes the prefunding for it?

Exactly -- well, yes. Our guidance basically for the full year does not include the Sunrise 16.

Okay, okay. And then, I think -- did you say that before management fees, Sunrise -- the 79 Sunrise facilities were up 14.2% on NOI? Is that correct?

Yes, that is correct.

Okay. So, if I think about the revenue being up 5%, really, where are you getting the leverage on the cost growth in the quarter?

Well, yes, there is a couple of things there. We had significant occupancy gains and also rate gains, as you point out. And then, with respect to the expenses, we did have some seasonally lower expenses in the portfolio, as I mentioned in my comments. In particular, utilities were about 12% less year over year, given the moderate winter that we had. And then, repairs and maintenance were similarly about 9% less year over year. And those two things I don't expect to continue for the balance of the year, Brian, but those were seasonably unusually low.

Got it. Okay. And then, just a quick question on the 16 facilities, in terms of -- maybe if you can provide us with any perspective. Do you expect to -- once they are under Ventas banner, to get more revenue growth? Or there are some cost initiatives that you can implement at these new facilities?

Brian, you have to come over to the private pay, high-end, senior living nomenclature here. Those are communities.

Communities, I'm sorry.

Okay, sorry, Ray. Go ahead. Communities.

That is fine. Certainly, Sunrise has been performing very well in our portfolio, and these assets have some additional upside. A couple of them were more recently open and are still undergoing their lease-up. So, there is some additional occupancy room to run in these portfolios. I think they compare very favorably on the benchmarking against our existing portfolio. So, we do think there is some good growth embedded in these assets, but it's primarily by virtue of the fact that there is still a little headroom on the occupancy.

Okay, great. Thanks a lot, guys.

James Milam, Sandler O'Neill.

I just wanted to dig in, Ray, a little bit more on the senior housing operating. Can you just quantify, maybe in terms of margin, what those seasonal expenses -- what impact they had? It just looks like there needs to be a bigger -- a pretty big expense increase going forward for you guys to come into your previous guidance rate on NOI for that portfolio.

Before management fee, yes, the margins were up about 260 basis points year over year on the Sunrise portfolio. So, that gives you the order of magnitude of some of the expense controls. Now, there is obviously a little revenue in there, because you are getting some leverage off your labor, some margin off your labor; but it was a moderate quarter, expense-wise.

But do you think on the overall portfolio, what you owe now, is it 31.5% what you expect to see for the margin for the rest of the year? Or do you think that gets squeezed a little bit?

I think it's probably in that 32% range where it's run historically, but we will see.

And that includes the full management fee?

Well, the margin before the management fee, yes, is around the 32% range. It might run a little lower, after management fee.

Okay, perfect. Thanks. And then, my second question -- or, I guess, second topic of questioning -- just the regional deal volume at about $56 million, that seemed a little light. Is that just -- is there anything driving that? Or do you expect that to -- I would think you guys would assume $150 million to $200 million a quarter. Obviously, deals are lumpy, but is that still what we should think about as a run rate for those regional teams?

My Chief Investment Officer is reminding me that we did $1.1 billion of other stuff at the same time, Brian. So, look, we are seeing a good deal flow from our regional originations network and from our existing relationships. The $56 million that we did in the first quarter is really just the way that the timing has come in. We are going to continue to work on a lot of stuff. The pipeline is active. As I said in my comments, I still think we can do some good business this year. So -- but it's lumpy, and --

And unpredictable.

And unpredictable.

Why is why we don't predict it. But one of the things that I'm really loving is that -- and we talked about this as we were getting ready for that call, is we have this great group of people now in the investments who are at Lillibridge, who are from NHP, who are from Ventas, and new and old. And that is giving us a lot of channels for growth. And we intend to take advantage of that appropriately, and I think as Ray said, we are seeing some good opportunities from that. But that lending of those channels is something that I think is a real positive of where Ventas stands right now.

All right, great. Thanks. And I'm sure John is happy to be in the room and not out on the road right now, anyway. (laughter)

Jeff Theiler, Green Street Advisors

Just a quick question on development and your development appetite. You have the redevelopments with Atria and the PMB developments in the MOB field. You started another development with this -- whole senior communities. Do you anticipate a pickup in senior housing development? Or how should we be thinking about your development, going forward?

Yes. Jeff, I think what we are seeing right now is that there is a modest amount of senior housing development going on. Construction starts are still generally less than 1% of existing stock. There are very limited construction financing options for people who want to develop right now. So, we do get the opportunity from time to time to look at some pretty attractive development opportunities. I would put these [Kelsh] investments in that category. So, we are doing a handful of these things, but I don't think it will become a significant part of our investment volume.

Right. I think it would probably be anywhere between $50 million to $100 million of capital in --

At any one point in time.

Okay, thank you. So, you are not seeing any signs -- with these strong senior housing numbers that you have put up, you are not seeing any signs that development is picking up across the industry at this point? Is that fair to say?

No. I think, like I said, we are seeing a handful of things that come across the desk, some attractive opportunities. The data still indicates that development activity is very modest.

It's still hard to get financing.

It's hard to get financing. Many of the large companies disbanded their development departments; and so, there is really not a lot of capacity for development right now. Now, we watch that very closely, and as the strong fundamentals of our sector continue to play out, perhaps there will be more folks that look to build new buildings to take advantage of that. But we are not seeing that right now.

Okay, great. Thank you.

Ross Nussbaum, UBS.

Debbie, on the Kindred bundles, I think you had used the -- I hope I heard you correctly, that you believe the rents are, quote, about at market?

Right, yes.

How do you quantitatively define the word about?

Okay. Let's get metaphysical. Look, I think they are at market. I think we said in our original release on this that people should [run] sensitivities, but if you were up or down 10%, it's about $0.03 of earnings. That is not defining about, but it's just a mathematical quantification of the magnitude of an outcome. But the assets are profitable, and we think the rents are at market, and there is a lot of cash flow here that we have to work with to go re-lease the assets to operators who are in those markets.

What do you think the annual CapEx spend is on those 64 assets?

Well, the good news is that Kindred has spent -- has kept these assets very much in good condition and has upgraded many of them. So, they are very good assets. And in terms of -- different operators spend different amounts on CapEx, really. So, a nursing home might be $500 a bed, an LTAC might be $1,000 to $2,500 a bed, something like that.

If we were using a number somewhere between $20 million and $25 million overall, is that anywhere near right?

No. It's much lower.

Okay. Next topic, life science -- it's the one, I will call it, big area that you are not necessarily in, in a major way. Where are you right now in terms of thinking about diversifying in that direction?

So, Ross, this is a question we get fairly regularly. And our answer remains the same, which is -- we like this space. We think it belongs in a healthcare REIT portfolio. It's a specialized segment that requires specialized expertise. So, it's not something we would dabble in. But if and when we found the right opportunity to either partner with or acquire an experienced operator to get into the space, that would be interesting to us. But when that might happen or how that might come about is hard to predict or pin down.

Okay. Final question for me is -- now that you have had some time to look back and watch Atria as a manager and Sunrise as a manager, how would you characterize the most notable differences behind how those two operators approach the business? And are you actually legally allowed to get them in a room and share best practices, given that you are the technical owner of the properties?

So, with respect to differences in operating models, the Sunrise is a very high-acuity, primarily assisted living and Alzheimer's model that is focused on the most need-driven population. And they really, really focus on providing that high quality of care and enabling the resident to basically live out the rest of their lives to the extent medically possible in their buildings. And that has always been their business model, and that is really what they distinguish themselves and are best at in the markets that they serve. The Atria model is a little bit different; it's an independent and assisted living model, some life guidance or Alzheimer's care, but it's a lower-acuity model. It's much more marketing-driven. It's much more lifestyle-driven.

Bigger apartments.

Bigger apartments. It's serving a bit of a different population. And I think they do an excellent job at serving their target market, as well. So, they are, in some respects, adjacent business models, not -- with some overlap, but not purely overlapping.

So, they are obviously both high-end major markets, great physical plant, and that is what they have in common. And that is why we have them under the management contracts, because they have higher growth potential. I think one -- again, one benefit of our expanded portfolio really is that we have a ton of data on the MOB business and on the senior living business across the country in various markets. And where we want to go is really the way the apartment guys have gone, which is to really use this data and -- for the benefit of our Company, and figure out before other people do where trends are going and things like that. And that is not really limited just to -- and that will help us in our acquisition efforts and in our asset-management efforts. So, I think that is something that really is a tremendous benefit to the platform that we have built.

Thanks. Appreciate it.

Daniel Bernstein, Stifel Nicolaus.

Congrats on a very good quarter.

Thanks, Dan.

Thank you, Dan.

The first question I had, not really directly related to Kindred, but maybe on a broader basis potential for the industry -- Kindred gave their keys back, it may be a unique situation. Do you think there is a potential for the industry, other operators in industry, to look at the tough reimbursement cycle and go -- we are going to go ahead and give up some of our leased assets, whether it's the LTACs or SNFs? But do you think there are any broad implications for the industry itself, going forward?

I think Kindred is -- Kindred has articulated that these are good assets. They just -- Kindred is really tacking off onto a slightly different strategy. But the fact that we have had 100 inbound, unsolicited inquiries about this portfolio says to me that operators out there are hungry to grow their EBITDAR and their cash flows, and we have good assets and EBITDAR and cash flows to transact with them. And so, that is really the take-away that I have, which is a very positive one.

And do you see consolidation as a greater likelihood in the skilled nursing space, as well?

I do think and have said across all, really, healthcare and senior housing that we do expect to see continued consolidation over time. And we hope to have opportunities to participate in that as the capital provider, which is, obviously, right down the fairway of what we do.

And then, also, I wanted to turn to the transaction side of the business. And there is nothing wrong with doing smaller transactions, but everybody seems to want the large cap REITs to do these big mega-transactions.

We like making money, even if it's -- we like good risk-adjusted returns, even if it's on a single building.

I agree. I agree. But with some of the lack of construction that we are seeing in the MOBs and senior housing, do you think there is -- is that going to impede the REIT's ability to make some larger acquisitions in the next couple years and maybe look more towards the assets that are already at the public REITs -- other public REITs or public operators? Because a lot of the stock out there is from the '90s and built in '05, '08, even some of the stuff like you just bought with Sunrise. That is all I am alluding to.

Yes. A couple things in that question -- one is, it's a trillion-dollar industry, healthcare real estate is, of which the REITs own maybe 8% or so. So, it's still a highly fragmented opportunity. There are still plenty of opportunities to acquire things, there are still plenty of good assets out there to be acquired. And so, that is pretty interesting and pretty attractive to us. I think one of the opportunities that is embedded in the question, as well, Dan, is the opportunity to provide dollars, like we have in our Atria portfolio, to redevelop high-quality assets in high-quality locations to either add additional programming or upgrade the common areas to drive rates, those sorts of things.

And we are seeing that in our Atria portfolio. I know a number of other operators are doing that right now -- expanding existing buildings to add incremental units. Those are very safe investments that can drive pretty attractive returns. And that is something that we think, with 1,400 properties in our portfolio, is a huge opportunity for us, that we are working on.

And I saw one of your triple-net leased operators you are redeveloping -- are you seeing more of your triple-net lease operators coming back to you, whether it's the SNF side or senior housing side, coming back looking for additional capital to make those redevelopments?

Absolutely. And likewise, we are pouring through our portfolio and saying -- who should we be calling to say -- are you interested in redeveloping? So, the communications are going both ways.

And I just wanted to go back to, Debbie, your comment right at the beginning of the call, where you are going to go ahead and continue to make progress, I guess, on the balance sheet. Can you define what that progress would be? You already have a fairly good balance sheet.

Yes. We are going to -- yes, we have a great balance sheet. And what I mean by that is we are going to continue to drive down cost of debt. We are going to continue to try to, obviously, enhance liquidity, stagger debt maturities, push out average weighted maturity levels, and tap different markets opportunistically. And that will help us continue to grow and make money for shareholders. But the other thing, I think, is that given our credit statistics and our performance and the performance of our assets, I think we should continue to move up the credit curve; and we will be working on that, as well.

Have you talked to the credit agencies about specific criteria to move to that next --

I think the restraining order is still valid. (laughter) Yes. We talk to them all the time, and the progress that we have made on the integrations is obviously important to them. And the -- our reported results, obviously, and our credit stats and our diversification are all tremendous positives.

Okay, okay. I will jump off the call. And again, great quarter.

Tayo Okusanya, Jefferies.

Couple of quick questions -- senior housing on the operating side, could you talk a little bit about what you are seeing, early April trend?

Yes. I think the occupancies are fairly flat. They are holding in there. So, that is encouraging.

And what about rentals?

Well, the annual increases take effect, typically, in January. So, in a month you are not going to see a big move in rents, other than January. So, again, I would say flat.

Okay. So, going back to James's question a few minutes back, it just seems like when I put all those numbers into my senior housing gumbo, that you guys probably end up about -- ahead of your estimated NOI from your senior housing operating platform.

And the way that I look at it, Tayo, is we are a quarter into this thing. Things have been slow in this business, and we hope that we continue to be doing very well in this portfolio. But we are a quarter into it.

Okay. That is helpful. And then, just a quick follow-up question, just another question -- from a regulatory perspective, if the Supreme Court really does end up overturning the healthcare reform act, every single facet of it is going to get thrown out. What, ultimately, do you think happens to operators? Which kind of property type do you think has -- gets impacted the most by that? And what kind of response do you think the healthcare industry would have to that?

Okay. (laughter)

Take your time, Debbie.

So, look, it depends, first of all, obviously what the Supreme Court does. And then, of course, what legislative reaction there is to what the Supreme Court does. The impacts of healthcare reform really have the most to do, I would say, with managed care and hospitals.

Yes.

Because the principal aspects having to do with the individual mandates, so that there is a bigger pool of people within the healthcare insurance sector, and then the requirement that the insurers actually insure preexisting conditions, for example -- those obviously have a big impact on managed care. And on the hospital side, obviously, the hospitals gave up some market basket increases over 10 years to pay for the fact that there is going to be greater volume and less bad debt, because everyone will be covered. And so, those sectors really have the most -- the healthcare reform bill, up or down, has the most impact on those two sectors.

SNFs paid for some of the reforms, but really aren't getting as many of the benefits as hospitals are, because they don't have an emergency room. So, they might be net winners, but the real answer is -- it's highly speculative. It depends what the Supreme Court does. I would guess that if the bill is struck down in whole or in part, there will be a legislative reaction, which I cannot predict. And so, it's hard to speculate, really, on the ultimate outcome or impact.

Okay. But all these hits that the SNFs and the hospitals have taken near term to pay for this stuff -- do you think CMS gives it all back if it all gets struck down?

Well, some of the -- again, some of the pay-fors are very related to the bill, but I don't know the answer to that question.

Okay. That is helpful. And just one quick administrative question -- the 6.75% notes that were Kindred, do you have a sense of what that is going to close?

It will close in the second quarter.

Second quarter -- earlier, later, middle?

Middle to later.

Okay. Middle to later. That is helpful. Thank you very much, Debbie.

Todd Stender, Wells Fargo.

Because -- and you just indicated this, Debbie -- because it's only speculation at this point with the healthcare reform outcome, is it still a wet blanket over transaction activity? And I guess I'm being specific with medical office buildings. Are you seeing anything where it's actually slowed down transactions and maybe impacted cap rates?

No, Todd, we really haven't. I think our pipeline is fairly brisk in the medical office building space. I think the -- and, in fact, leasing activity is picking up a little bit. I think people are adjusting to the new normal of having a little bit more uncertainty in the world and trying to proceed with their businesses. So, I think perhaps maybe a year ago it was more of a wet blanket than it is now.

How about length of stay? Are the doctors willing to go out a little bit longer on lease maturities? Or are they tightening it in more of the two- to three-year range versus the old five- to seven-year?

I think the trend generally has been the shorter lease is probably more 5 years than 7 or 10 years.

Okay. And just on your occupancy, just on the stabilized piece, is down in the 92% range. What should we think about for more of a stabilized number, going forward? And is this really a function of you guys maintaining and pushing rental rates?

You are referring to the MOBs, correct?

Yes, thanks.

Okay. Yes, I think the stabilized rate is probably in that 90% to 91% range. That is really what we are looking at. We have had some good success with rental rates, as you point out. We did have some scheduled moveouts in first quarter that brought our occupancy down slightly; and so, we expect to recover some of that as the year plays out.

Okay. And just finally, how does the Cogdell Spencer portfolio -- how does that compare to your existing portfolio, particularly with the rental rate per square foot?

Good morning, Todd, Todd Lillibridge. It's very consistent, first and foremost. And as Ray pointed out, we have a good group of 72 on campus, for the most part, assets; rental rates in line; well occupied, in the 92% level. And for us, it's a good strategic fit, in terms of the Carolinas, and so brings our portfolio -- that is, in the MOBs, into a well-diversified balance across the country. But the rental rates are very consistent with the balance of the portfolio.

Okay. Thanks, Todd.

Karin Ford, KeyBanc Capital Markets.

Just quickly, where do you think skilled nursing cap rates are today? Or have cap rates changed, in your view, in any of the asset classes that you guys are looking at?

Well, I would say that cap rates for skilled nursing have probably hit their -- I don't know if you want to call it the peak or nadir, but the lowest cap rate and the highest valuation maybe last year before the 11% reimbursement changes. And so, they are probably, depending on quality and operator structure and so on, they are probably gapped out from that point. But it really all depends on qualitative factors.

And do you have an order of magnitude on how much you think they gapped during that time?

Again, it depends on qualitative factors. So, it's kind of hard to peg a specific number.

Okay. And during that short period of time, where the yield on the 10-year ran up, did you see any change in pricing? And what is bringing sellers to the table these days?

Yes. One thing that is interesting is that -- and I have done a lot of work on this, is that as -- the capital markets, as you know, are 12 to 24 months ahead of actual property-level kinds of response, in many cases. And so, what we have seen in the past with pricing is that even as interest rates go up, sometimes you have this lagging effect where cap rates continue to fall and even invert for a period of time. So, I can tell you, as rates were rising up there for a while and now they have fallen back again, we did not see any really immediate change in property-level pricing.

That is helpful. And then, just last question -- I noticed there was a mention of lease termination fees in the press release. Was there any lease termination income in the income statement this quarter?

Yes. When -- and this is very consistent with the past -- in transactions like the ones we have done with Kindred and Brookdale, there is commonly a lease termination fee in connection with a termination of the lease. And so, that is in the first quarter.

And how much was it, and which line is it in?

It's in discontinued operations, and it's $1 million and change.

Okay, great. Thank you very much.

Michael Bilerman, Citi.

Debbie, I just wanted to follow up a little on the bond activity that you did, and how you are thinking about things. And I know you try to be balanced in everything you do, but it just strikes me, in terms of issuing the debt, which you got favorable rates down in the 4%s, and then tendering for the 16 and 17 maturities about $400 million, using about $460 million of proceeds, which includes your $40 million of make whole. You are saving about, let's call it $10 million a year by doing that. But you paid $40 million, right? So, you are effectively just --

No, we did --

No, no, no. That is the gain.

No, no, the $40 million is the gain on the sale.

How much was your make whole on the redemptions?

Oh, you are lumping together the $29.7 million and the $10 million?

Yes.

There is a non-cash portion.

Go ahead, Rick. Yes.

There is a non-cash portion. So, the penalty on the 6.5%s was only [$6 million] point something. So, the rest was just a write-off of the discount.

They are both NPD-positive and they extend maturities.

But so, how much -- so, your total make whole on both of them was like $10 million, like one year of savings?

Yes, the total -- yes, was under $10 million.

Okay. So, it's a lot less -- a lot more attractive than a one for one.

Yes, yes. That is a good question, but yes.

And are you thinking about it just solely from that point? You are extending duration at a lower rate? And effectively, in your mindset also, your view is that rates are going to be a lot higher in '16, '17, so you would rather refinance those maturities today?

We -- look, I have given up prognosticating about interest rates. And some of the -- we have talked about this -- some of the smartest people I know said five years ago rates could never go lower, and they have progressively gone lower and lower. So, again, we are just trying to stagger maturity schedules; make sure we are prefunding ourselves, so that we don't get caught in a market disruption, if you are up and anything else happens; intelligently redeploying the proceeds, hopefully intelligently; and continuing to lengthen, on average, our maturity schedule, but don't go whole hog one way or another. Just continue in to average in, hopefully at progressively lower rates if we can, so that any one year doesn't cause a material change one way or another in our income statement or cash flows.

And is there anything that, as you look at the maturity schedule today, that we should be mindful of trying to pull forward even further? Because the bonds -- what you are doing is obviously accretive on an FFO basis by $0.03 or $0.04 a year, just by doing what you did.

We are happy to report that in May, we will have our last high-yield bonds gone away. So, that is really good. And then, we have mortgage debt that is coming due going forward. And hopefully we will refinance that both on an unsecured basis, at least in part, and at lower rates.

Is there anything that you can prepay today? As you think about your '13 maturities, you have [500] of --

Probably later in the year.

Okay.

So, it wouldn't have a big impact, presumably, on 2012 earnings.

Right. But as you think towards 2013, where you have $1 billion debt coming due at a 5.5% blended split between unsecured and secured, the likelihood is that is going to have a materially lower rate than 5.5%, if you think about it.

It will, but remember -- yes. It will on a cash basis. Again, it may not to the extent that it was assumed debt that was -- that where the income statement books interest expense potentially at a below-cash level. So, it would be cash-positive; and depending on what we were prepaying, it could be income statement the other way. So, we can talk about the details of that with you.

Okay.

Connor Finnerty, Goldman Sachs.

Debbie, just going back to Sunrise and the [two key] investment -- obviously, not a tenant, but do you guys track or cap your exposure, then, as an operator?

Who?

For Sunrise.

Oh, okay.

Do you view it like a tenant, in that they have X percent of NOI?

Let's talk about that, because that is a great question. We want to be -- we want to have a balanced, diversified portfolio. That is what we have been working toward for a dozen or more years. We want to have it balanced and diversified by tenant operator, by asset type, by business model. So, that -- again, we have this 26% of higher-growth senior housing operating, and that is broken down further by Sunrise and Kindred -- Sunrise and Atria as operators.

So, it is relevant that Sunrise is half of that, let's call it, 26%, and Atria is the other half, and we do look at that. But I would say, again, to everyone, those -- that portion of our portfolio is really like senior apartments. It is really -- we are renting to the grandmothers and grandfathers who are in those units, and we are directly getting the cash flows from those assets, just like multi-family. And then, we are paying the manager a management fee. And so, there is no -- and what is different about that from the triple-net portfolio is there is really no credit aspect to the relationship.

It is a diversified, very granular, very reliable, like multi-family, set of cash flows. Because Mrs. McGillicuddy is going down and paying her rent every month, and there is virtually no bad debt in that portfolio. And so, we think about it. It is relevant, how -- what that slice of the pie is with Sunrise, but it is very different. We view it as very different, and much more like multi-family. And in that way, lower -- more reliable, if you will, and because there is no credit exposure. So, hopefully, that is a complicated -- it's a complicated answer, but hopefully it answers your question.

No, no. It helps. I was asking it more on the line of how much more you thought you would be comfortable with, or how much more you could do with Sunrise on a go-forward basis. But that is helpful.

Okay, thank you.

And then, just switching to the medical office side, you hear more and more about the non-healthcare REITs getting into this space. Can you talk about the level of competition you are seeing today for build-to-suit, for development? And where do you think that pushes yields and potentially cap rates, call it over the next 12 months?

Well, again, one of the interesting things about healthcare and senior housing is that that is where there is demand, that is demographically under -- has demographic underpinnings or tailwinds. And so, people want to go where the demand is, and it's much more so than in many other segments of real estate. So, we have some great MOB developments underway. One is with AA-rated, totally preleased with Sutter Health in northern California, at about an 8% unlevered return. And I will let Todd or Ray talk further about the competitive environment.

Yes, Connor, I think it's really important to note that the request for proposal process and the decision-making process of the hospitals in the MOB space is a little bit different. And they are very concerned, because this is their campus, this is their franchise, that they are doing business with people who are experienced, reputable, and that they can trust. And so --

And have done it before.

And who have done it before. And so, our Lillibridge business has among, if not the best, reputation in the space for being a good partner for the health systems. And that is a real advantage for us when we go in and sit down with hospitals and talk about building them a new building. So, it's not something -- there are high barriers to entry from a relationship standpoint in this marketplace, and that is something that people can just jump into as a -- as an opportunity set. And that is, quite frankly, one of the reasons why it took us as long as it did to get into the medical office building space, was because you do have to have that credibility, you do have to have that reputation, if you want to do business with the best hospitals, like we do.

Perfect. Thanks.

Thank you. I think we have time for maybe one more question.

Philip Martin, Morningstar.

Just dovetailing on this last question and response, it certainly sounds as if there is a robust deal pipeline. Can you characterize even a bit more the sellers in this market? How are the sellers weighting their sales decision, in terms of the importance of cost of capital, price, and ongoing relationships? I think in commercial real estate, everybody is so focused on -- there is a lot of competition out there. Price is always one of the key or more important determining factors. But in healthcare -- healthcare is a bit different. And again, you touched on that in your last answer, but I would be interested in a little more follow-through on that.

Sure. Phillip, price wins, okay? Let's just be -- this is -- at the end of the day, you have to have the best price. But at the margin, your reputation, your ability to be a good partner, particularly when you are talking about some of the seniors housing, say a leaseback or operating asset transactions, that can help you win a deal when you have a strong price on the table. And that is what we focus on. We have people that come to us and say -- we want to do business with you because of your reputation, your capabilities. You can be a great partner for us going forward. But we still have to match the price.

Okay. And shifting gears a little bit, is Ventas seeing the role of the skilled nursing facility change within the integrated delivery system?

Well, it has been evolving over time, as you know, from more of a long-term custodial model to a high-acuity, rehab shorter length of stay business. And a lot of the nursing homes that we have, obviously, are in that niche; and that may continue, as there is post-acute bundling and so on and integration of post-acute care. So, yes, I would say that that is a trend that is continuing. And one thing about healthcare is, it's always changing. And the services, the good operators are able to change their healthcare delivery as the environment is changing. So, that is true, and I think that will continue.

And would you believe that that is an underlying catalyst to better valuations for those assets over time, in the hands of the right owner/operator, et cetera?

Well, obviously, if the healthcare delivery system is asking to have patients go and be treated in the lowest-cost, most clinically appropriate setting, it certainly could be positive for the skilled nursing business. And this is all long-term secular trends that will continue to evolve.

Yes. Okay. I appreciate it. Thank you.

We, do too. Thanks, Phillip. So, everyone, thank you so much for joining our call, for your interest in Ventas. We very much appreciate it, and we look forward to seeing our investors here in Chicago at the Green Street conference and then again at NAREIT in June. So, thanks to everyone

All right, ladies and gentlemen, that will conclude today's conference. Thank you very much for participating. You may now disconnect, and everyone have a great weekend.