芬塔 (VTR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-two 2013 Ventas earnings conference call. My name is Julia and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Lori Wittman, Senior Vice President of Capital Markets and Investor Relations. Please proceed, ma'am.

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 June 30, 2013. 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 federal securities laws. These projections, predictions, and statements are based on the 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 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, 2012, 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 the 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 Deborah A. Cafaro, Chairman and CEO of the Company.

Good morning, everyone. I want to welcome all of our shareholders and other participants and thank you for joining Ventas's second-quarter 2013 earnings call. It is great to be able to share our strong second-quarter results and increased guidance with you.

After my brief overview Ray Lewis will discuss our portfolio performance and Rick Schweinhart will review our financial results in detail. Following our remarks we will be pleased to answer your questions.

We all know that the second quarter showed significant capital market volatility, catalyzed by Fed commentary in late May. We positioned ourselves well ahead of the market changes by creating significant liquidity to fund current and near-term capital needs.

This quarter we continued to focus on enterprise growth with financial strength. We delivered excellent results, and we executed our strategy. Let me touch on some of the quarter's highlights and accomplishments.

Normalized FFO for the quarter was $1.01 per share. Our results represented 9% per share growth compared to the second quarter of last year, excluding non-cash items.

Drivers of performance were same-store portfolio growth of 3%, accretive investments, and new developments. In the quarter we generated cash flow from operations at an annual rate of $1.1 billion compared to our annual dividends to shareholders of less than $800 million. Our significant free cash flow is one of the Company's most valuable attributes, because it provides great flexibility for future external growth, reinvestment in our assets, reduction in debt, and/or increases in our dividend.

We were very proactive early in the year and raised $840 million of attractively priced debt and equity capital, as we discussed in our last call with you. As a reminder, we issued $760 million of 15-year fixed-rate debt with a 3.6% blended interest rate. Unlike our usual matched-funding approach, we essentially pre-funded our midyear capital uses.

These actions were forward thinking and value creating. However, they did result in temporary quarterly dilution exceeding $0.02 compared to the first quarter, as we mentioned then.

We also continued to successfully execute our capital recycling and risk management plan. Since the beginning of April we have sold assets and received loan repayments totaling $160 million.

Due to our timely capital raising and recycling, we finished the quarter with excellent liquidity of $1.7 billion available under our revolver. Our credit metrics also remain fantastic, at 29% debt-to-enterprise value at quarter end.

As the second quarter closed and the third began, we started putting our capital to work. Our investment activity since the beginning of Q2 exceeded $400 million, and we have a like amount under contract currently. Virtually all of our investments are in high-quality senior housing or medical office buildings with expected unlevered yields averaging 6.5%.

Another highlight of the quarter was the successful completion of our 2013 renewal process for 89 licensed healthcare assets that were up for renewal in May. As we projected, all transactions and transitions were completed by July 1, achieving an excellent result of greater tenant diversification at the same NOI level. We welcome our new tenant operators and look forward to their success.

I also want to recognize our asset management and legal groups for their outstanding effort and results. Great execution is a hallmark of Ventas's Sustained Excellence.

As a result of all of our activities we are really happy to increase our full-year normalized FFO guidance to $4.06 to $4.10 per share. The midpoint of our guidance range is increasing $0.05, mostly because of acquisitions and expected portfolio performance in the second half.

If we achieve the midpoint of $4.08 per share, it would represent 10% growth in full-year normalized FFO per share excluding non-cash items. Including those items our reported growth would range from 7% to 8% per share.

Although our increased full-year guidance does not include additional investments beyond the $400 million currently under contract, our investment pipeline remains strong, with deals large and small in various stages of activity. While we can never predict the timing or volume of investments within a specific time frame, we remain highly confident about our external growth opportunities.

In sum, we have built a balanced Company that can deliver results in a multitude of economic, reimbursement, and capital markets environments. With our skilled team focus, our portfolio performing, and our external growth and refinancing activities adding value, we are on track to achieve the consistent superior results and sustain the excellence you have come to expect from us. Rick? (sic)

Thank you, Debbie. With the acquisitions completed so far this year, our diverse and balanced portfolio now stands at 1,439 seniors housing, medical office, and post-acute properties in 47 states and two Canadian provinces. This productive portfolio turned in another strong quarter, with 3% year-over-year same-store cash NOI growth.

Today I want to briefly run through some of the second-quarter portfolio highlight, starting with our seniors housing operating or shop portfolio. Once again, this portfolio of 227 best-in-class seniors housing assets turned in another strong performance in the quarter, delivering $110 million of NOI, which represents 14.4% growth versus the prior year.

Occupancy in the total portfolio finished the quarter at a strong 90.9%, which compares favorably to the NIC MAP second-quarter 2013 average seniors housing occupancy of 89%. Year-over-year, occupancy in the second quarter for the 196 properties in the same-store portfolio increased 160 basis points. REVPOR increased 3.7% and NOI increased 6.9%.

Sequentially, on the 220 same-store properties, REVPOR increased 70 basis points and NOI increased 1.5%.

Our non-stabilized portfolio consisted of three properties in the second quarter of 2013 versus 13 properties in the second quarter of 2012, as a number of our redevelopment projects have been completed, leased up, and moved to the stable portfolio. For the 10 projects that we have since moved from the lease-up to stable, year-over-year NOI growth was 33% driven, by an 890 basis point increase in occupancy, a 3% increase in REVPOR, and a 500 basis point increase in margin.

As you can see, our redevelopment projects provide exceptional growth and attractive risk-adjusted returns. The seven projects we have approved and completed since our ownership have delivered an average annual NOI growth rate of 15% and an average unlevered yield on cost of about 11% at this point in their stabilization.

So far this year we have approved another seven redevelopment projects totaling nearly $75 million of investment and have an active pipeline of over $200 million of additional opportunities that are under evaluation. So our shop portfolio continues to deliver strong performance, in line with our expectations.

Next I will turn to the performance of our triple-net lease portfolio, which is diversified across 855 seniors housing, skilled nursing, and hospital assets. As a reminder, these long-term net lease properties produce steady cash flow with escalations, the majority of which are tied to CPI.

Same-store cash NOI in the second quarter was up 1.3% year-over-year. Cash flow coverage in the 831 properties in our same-store triple-net lease portfolio for the first quarter of 2013, the latest available information, was strong at 1.6 times and remains stable.

Likewise, coverage in our 143 same-store Kindred assets remains strong at 2 times, while quality mix in our Kindred portfolio improved from 73% to 77% sequentially.

As Debbie mentioned in her remarks, we are extremely pleased to have fully completed the renewal, releasing, and transition on the 89 properties that were up for renewal in 2013 with Kindred. Of the 89 properties, 35 were renewed with Kindred.

The 50 properties that we leased to new operators are now fully transitioned and the operators are performing well, and we completed the sale of four nonstrategic assets. Through this process we proved that our assets are valuable in the market and that we can successfully execute a complicated multiparty re-leasing project.

Finally, I would like to provide a few comments on our medical office business. At the end of the second quarter our consolidated MOB portfolio consisted of 302 properties spanning over 16 million square feet and accounting for approximately 17% of our annualized NOI. These high-quality assets, of which 94% are on campuses or affiliated with highly-rated health systems, continued their strong performance in the second quarter.

Through the first half of this year, cash NOI growth for the 254 same-store properties was a solid 2.6%. Year-over-year, same-store cash NOI growth for the quarter was 1.4%, due primarily to the timing of expenses and recoveries.

Total MOB portfolio NOI grew to $72.5 million in the second quarter up from $59.5 million in the second quarter of 2012, due primarily to acquisitions. Occupancy across the entire consolidated portfolio increased 30 basis points year-over-year to 90.6% in the second quarter, again due primarily to the high-quality acquisitions completed last year.

We also continue to make good progress with our lease-up assets. Occupancy in our lease-up portfolio increased by 310 basis points over the second quarter of 2012. In addition, occupancy for the 13 properties in the lease-up portfolio in the second quarter of both 2012 and 2013 increased 380 basis points.

With that, I will turn the call over to Rick Schweinhart, who will discuss our financial results. Rick?

Thank you, Ray. First, a recap of second-quarter cash flows. Cash flows from operations were $277 million, up 29% from the second quarter last year. Dividends were $197 million, producing a net of $80 million available to invest. In the second quarter we had approximately $378 million in real estate investments.

In addition to the cash flow, we raised $758 million in debt capital in the first quarter, which paid down our revolver, resulting in ample liquidity for the investments. We also received proceeds of $90 million from asset dispositions, loan syndications, and loan repayments.

We issued 1 million shares, raising $77 million under our at-the-market program in addition to the $5 million raised in the first quarter. We assumed $69 million of 3.8% debt as part of the acquisitions. With all of the sources of funds, we only borrowed approximately $45 million on our revolver, net of debt repayments.

During the quarter and subsequent to quarter end, we paid down $163 million of secured debt. Our revolver balance at quarter end was $260 million. We currently have unrestricted cash of $56 million and almost $1.7 billion in borrowing capacity available on our revolver.

Now let me focus on second-quarter results. Second-quarter 2013 normalized FFO was $1.01 per diluted share, an increase of 6.3% compared to the second quarter of 2012 per share results of $0.95. Normalized FFO increased 7% to $298 million compared to last year's second quarter of $278 million.

Second-quarter 2013 normalized FFO increased from last year's second quarter due to our last four quarters' investments of over $1.8 billion; NOI increases in all three of our segments; lower weighted average interest rates, offset somewhat by higher debt balances from our acquisition activity; increases in net cash balances during the quarter resulting from capital raises; asset sales; and receipt of loan repayments.

Average cash interest rate improved 50 basis points to 4.1% at June 30, 2013, compared to June 30, 2012. Weighted average shares outstanding for the second quarter were 295 million shares, up less than 1% compared to the second quarter of 2012.

At June 30, our credit stats remained outstanding with net debt to pro forma EBITDA at 5.3 times; our fixed charge coverage ratio in excess of 4 times; secured debt-to-enterprise value of 10%; and debt-to-enterprise value at 29%. On April 2, S&P raised our outlook to positive on our BBB rating.

We are increasing our 2013 normalized FFO per diluted share guidance to $4.06 to $4.10 from $3.99 to $4.07. The midpoint increase is to $4.08 from $4.03. The midpoint results in growth of 7.4% in normalized FFO per share.

We have included the impact of closed acquisitions and approximately $400 million in additional acquisitions that are currently under contract. The guidance does not include the impact of additional capital transactions or unannounced acquisitions.

Operator, if you would, please open the call to questions.

(Operator Instructions) Juan Sanabria, Bank of America.

Hi, guys; Juan Sanabria here. Just a quick question with regards to your acquisition pipeline. Could you just give us a bit more color on how it appears relative to before the Fed Chairman spooked the market and debt rates shot up? What do you think is low-hanging fruit with some partners that you have out there, that you think you can maybe transact on over the course of time?

Well, good morning. I think our pipeline continues to be very strong and we are seeing a good volume of different kinds of transactions across the spectrum of assets. That really has not changed given the Fed's commentary, and so that is very positive.

I think as Ray mentioned, we have some great development -- redevelopment opportunities with our existing operating partners, and we are continuing to see some deal flow from the 100-plus tenant operators that we have in our portfolio. And then, of course, we are seeing a lot of investment opportunities really from third parties in the market.

Great, thanks, and then just I guess a modeling-type question. When should we be model that these second-quarter acquisitions closed? Were they more towards the end of the second quarter? And with regards to the 400 --

Yes, the second quarter it was towards the end.

Okay.

And the ones under contract will be toward the end of the third.

Okay, great. Thank you very much. That's it for me.

Emmanuel Korchman, Citi.

Good morning. Just if we look at your press release here, Debbie, you guys mentioned that seven of the senior housing communities were transferred to Atria. I was wondering if you can give some details there, maybe give us some insight as to how we should look at deals going forward.

Is that something we should expect, that maybe Atria becomes a consolidator, and you find deals and you put them into that platform?

That's a great question. Of our acquisitions in the second quarter, upon closing of the high-quality senior housing assets that are all private pay and in Atria's footprint, we have been transitioning operations of those assets to Atria at the closing. As we have talked about before, Atria is one of the premier senior living providers in the United States, with the ability to scale and a really great platform. So we believe they will continue to grow and will be one of the potential consolidators in the industry.

Yes, I mean, where we can find assets that fit our strategy of being the best assets in the best markets, the opportunity to put those in with Atria is one of the values of our relationship with them. So we really want to capitalize on that.

Maybe just in terms of the mechanics, is that the type of scenario where you go out, you find the asset, and you say -- this will be great under Atria? Or are they out there finding stuff and saying -- hey, Ventas, does this work for our relationship?

It's both. We are going out and finding acquisition opportunities that we think would be value-added for Ventas and where we think Atria would be a great operator. And they, of course, have their own network that would identify opportunities as well.

Perfect. Then maybe switching to the redevelopment comments that you made earlier, when we look at your pipeline, it is kind of -- you have got this $151 million of approved deals in the release, $240 million of total development projects out there. How should we think about the yield and the capital committed to those and your returns?

Yes. As you know, the redevelopment pipeline targets assets in our portfolio where we can add additional value by adding programming such as memory care, or upgrading the facilities to drive rate. So far with the projects that we have completed and that have stabilized, we are achieving the 11% returns that I referenced in the opening comments.

I would say the pipeline is very consistent with the projects that we have done historically. So we would hope that they would achieve similar types of returns as we implement and stabilize those.

Great. Then final one for me. As we look at your pipeline, whether it be the $400 million or outside of that going forward, should we assume that they are all going to be senior housing and MOB? Or is there a chance that it is outside of that spectrum?

In the acquisitions under contract right now, they are straight down the fairway, consistent with our strategy, kind of private pay, high-quality senior housing and MOBs. But in the pipeline generally, it would be across the spectrum of healthcare and senior housing assets.

Thank you very much for the time.

Jack Meehan, Barclays.

Hi, thanks. Good morning, everyone. I was hoping to get a little more color on the Kindred disclosures. Could you remind us, what is the right way to think about the management fee to get from EBITDARM to EBITDAR? Is it still 40 to 50 bps?

In general -- again it depends on -- that is an imputed number. So we produce the cash flow number, which is the EBITDARM number.

And as you look at repositioning a portfolio or transitioning it, what you really have to think about is what is the incremental or marginal costs of a provider to take on those assets. That may be as low as 1% or 2%.

If you want to use a 5% or 4% management fee, that would get you to your 40 to 50 basis points.

There is another dimension to that as well, whether it is a nursing home or a hospital. Obviously the hospitals have much higher revenues and lower percentage overhead.

Okay, got you. That makes sense. Then just one other on the disclosures. What else is embedded in the Kindred EBITDAR that you report? Is this just the true EBITDAR generated from the leased facilities that Kindred has with Ventas?

I see you back out rehab care. Is there anything else?

Everything is transparent on that. So it is basically the EBITDARM and the therapy, as indicated.

Okay, got you. So would that include things like home health as well?

No.

Okay. Then just one other -- on the guidance for the RIDEA portfolio. So first half of the year, NOI was around $218 million. That would imply a similar contribution in the second half even though you are showing really good year-over-year trend.

What are some of the factors leading you to maintain guidance at this time? Is it the redevelopment with Atria, or is it something else?

No, I mean I think if you look at the guidance that we have provided of $430 million to $440 million there were some very basic assumptions built into it that we talked about when we announced the guidance. At that time we said average occupancy would be up about 200 basis points across the year, average rate would be up around 3%, and the average margin would be up about 30 basis points.

Through the first half, we have tracked that pretty closely, and so we would expect that that will continue through the second half. And we are very comfortable with the guidance range that we have provided on the base portfolio.

Okay. Then the average occupancy in the same-store portfolio was down 10 bps sequentially. Is there any way to get a read on maybe a point-in-time estimate how you left the second quarter relative to where you entered it?

Yes. The decline in occupancy in the portfolio of 10 basis points is consistent with historical seasonal patterns and also what we saw in the broader NIC industry data. What typically happens is occupancy declines through the first quarter due to the flu season and coming out of the holidays, and kind of runs -- reaches its bottom around the April/early May time frame, and starts to grow heading into the third quarter.

We have seen that pattern repeat in our portfolio this year. Last year we bucked the trend a little bit, and we talked about that in the second quarter of last year. But this year we are following normal seasonal patterns.

Okay, perfect. Thank you.

Jeff Theiler, Green Street Advisors.

Hey, good morning. Looking at the latest industry data from NIC, it seems like there is a pretty significant increase in construction starts, which fits all the anecdotal evidence that at least I have been hearing about increasing development in the senior housing.

Is this something you are seeing? Are you worried about this at all?

And how do you project your longer-term NOI growth for your senior housing operating portfolio, say over the next 2 to 3 years?

Thanks so much for asking that.

Yes, Jeff, it is something obviously that we watched as NIC announced their data. I would make a couple of comments.

One is I think the NIC data is informative but it lacks texture in that it really talked about absolute units under construction. It is really important to put those into perspective by market as a percentage of inventory, and also consider what the occupancy in those markets are, and what the growth rate of the seniors population and adult-child population target market is within those MSAs.

But setting that aside, we have gone back, obviously looked at our portfolio to understand what is going on in each of our markets. And as a general statement, our assets are in high barrier to entry infill locations within their markets.

When you look at our portfolio, about a quarter of our NOI comes from the New York -- and I am talking about the shop portfolio. A quarter of our NOI comes from the New York Metropolitan statistical area, where construction as a percentage of inventory is about 2.3%, so very modest construction.

Then when we looked at the rest of our portfolio, there is no other MSA that accounts for more than 5% of our total portfolio NOI. So we are very diversified across the markets.

But as we look forward on the growth I would say it is pretty consistent in that 4% to 5% range, long-term growth rates. And near-term we see pretty consistent with what we have been reporting.

Okay, so you think at least 25% of your portfolio is relatively protected versus the rest of the industry? Okay.

Well, more than that, I would say. But just to -- again, the New York Metropolitan area we have got about a quarter, and construction there is very low as a percentage of inventory. I think that was really the point.

There are other markets where we feel very protected because of the infill location barrier to entry, and the cost to entitle and construct. So we do think we have a really high-quality portfolio that has some good characteristics.

I would also just summarize by saying that occupancy in senior housing is expected to continue to rise into 2014 because of the growth in the seniors population, among other things. But net absorption is expected to continue to be positive.

Okay. Just a quick clarification on one of Ray's earlier comments. Ray, I think you said you have another $200 million of redevelopment projects under consideration. Is that in addition to the $240.4 million that we see in the supplemental, or is that encompassed in there?

That is in addition to.

Okay.

We are constantly looking at our portfolio to identify opportunities. And one of the benefits of having over 1,400 properties is that there's a lot of good opportunities like that in the portfolio.

Got you. How big do you think you would be comfortable with a redevelopment program? What size is your max, would you say?

We're not really targeting a maximum amount or a minimum amount. I think our goal is to try to find the projects that generate the attractive returns, and to phase them in and have a consistent flow of transactions.

That is not -- so, Jeff, you shouldn't look at our $200 million pipeline and say we will do all $200 million of that. We will pick the ones that we think make the most sense, and then we will probably find some others in our portfolio over time that we will add to the pipeline.

Right.

Got it. Thanks very much.

Daniel Bernstein, Stifel.

Good morning. On the development side, I am thinking about your investments here. You have increased the number of redevelopment you have, increased the number of development just generally it looks like in the portfolio.

Is there an investment drift a little bit away from acquisitions to development, aside from anything that has happened on the capital cost side? Just from where cap rates have gone in the last few years in seniors housing and MOBs and other asset classes, are you looking a little bit more at development now for growth versus acquisitions?

I would say that our strategy has been very consistent and that we have really been able to create a lot of value for shareholders by investing over the past couple of years in highly accretive, high-quality assets. And we expect that we can continue to do that and will.

I would say that as far as the redevelopment and development pipeline that as we have grown, as Ray said, we have more assets that create good risk-adjusted return opportunities. That pipeline was getting smaller as we had completed projects and brought them online, and so now we are just refilling that pipeline.

It should, as he said, be a consistent part of our business. So I would say, again, very consistent and we should be able to deploy capital in both investments as well as in redevelopment as part of our capital deployment strategy to create value.

Okay. On the Atria assets that were -- I guess the assets that were moved to the Atria operating platform this quarter or second quarter, are those part of the redevelopment projects that you are looking at? Are those already stabilized and in good shape, or are they --?

No.

Okay.

No, those are all 90-plus-% occupied type assets in infill locations, and they are kind of plug and play.

Yes. Those are over 93% occupied, Dan, and stabilized.

A similar kind of unit mix price point?

Yes, AL/IL.

Okay. Then just also on the portfolio pipeline generally, you alluded to what still is a robust pipeline out there across asset classes. But have you seen any change in cap rates, any change in the motivations of sellers here?

Are they pushing portfolios a little bit faster than you -- into the market, worried that cap rates are going to move back up? Or are you delaying any acquisitions at this point, waiting to see where capital costs will move?

I would say that the deal flow, as we have said, has been very significant and very consistent. I would say that across real estate generally there hasn't been a significant movement in cap rates since the interest rates have been rising.

I would say that if there is more of a move over time you would expect cap rates to adjust accordingly. So the spread between cap rates and the risk-free rate has narrowed a little bit in real estate generally, but that is narrowing from all-time highs that we saw in '11.

So I think it is a pretty normal environment and one in which we feel confident we can continue to make money for investors.

Does that narrowing of the spread imply that -- will you take any additional balance sheet risk in terms of running out the credit line a little longer, or moving from 10-year debt back to 5-year debt, just to temporarily maintain the spread that you are looking for? Or is that just not something you would consider at this point?

Well, I think we have been, again, very consistent about our balance sheet strategy. I think we have been able to grow FFO per share at 10% compounded rates for a long period of time. And we have been able to do that with really strong balance sheet, a lot of financial strength and flexibility.

So we would expect to obviously react to external conditions, but we will maintain good financial strength and flexibility. So we can do both.

Okay. All right. That's all. I will jump off. Thank you.

Rich Anderson, BMO Capital Markets.

Thanks, good morning, everybody. Hey, Ray, did you say -- this question is for Ray, I think. Did you mention that in New York the construction as a percentage of inventory for shop is -- or for senior housing is 2.5% and that is low?

Yes. It is about 2.3%. I think in total there is about 570 units under construction in the New York MSA.

Okay, because 2.5%, 2.3% doesn't seem low to me. I guess the algebra is a little bit different in the senior housing space, because that would be more like an equilibrium number in many other property types. Would you agree with that?

Well, I only can speak to the seniors housing space, Rich, and we are very comfortable with that level of construction.

Okay. Second question. Have you looked at how the composition of your shareholder base has changed since May 22?

Of course we have limited ability to get good data until the end of the quarter -- 45 days really after the end of the quarter.

Okay. Next topic. On the 2015 Kindred expirations, can you talk about maybe any lessons that you might have learned in the first go-round that you will apply this time around? Or are you happy with how it went and you maybe would just mimic it word for word this next go-round?

Good question.

I will say we are happy with how it went. We transitioned all the assets at the same rent levels.

So we, through that process, developed a playbook that will serve as a guide for this re-leasing process. Every single one of these things is going to be different, obviously; but we learned a lot in the last go-round.

One of the things I think, Rich, that we learned is it's really important to get in front of the regulators as quickly as possible. There are things in the process that are outside of your control. So speed, focus, and getting in front of the third parties is a critical success factor.

So we will build on what we learned in the last go-round and we have got a good playbook for the 2015s.

Okay, great. Then my last question is on the guidance. It has become a little bit more normal for you to include unfinished acquisitions in your guidance. You did that again this quarter.

I am curious. Do you feel like the path for Ventas to increase guidance now will be more externally growth driven? That is, including stuff that has not been completed. That has typically been your way -- to have an unvarnished guidance, without unfinished acquisitions.

But now that maybe the occupancy gain is winding down in your senior housing that you want to include noncompleted acquisitions in the guidance, is that the motivation? Or just curious why that change in your guidance methodology?

Yes. We have talked about that before, and I think it is quite contrary to your hypothesis. I would tell you that the reason that we are doing it is -- typically, when we have already raised the capital to do something -- which we pre-funded, as I mentioned, we raised the $760 million in debt at 3.6% in the first quarter for 15 years -- it becomes mathematically misleading almost to say, well, we have raised the money and we are going to let it sit there. Because it artificially, as you saw this quarter, it temporarily and artificially diminishes earnings.

So that seems like it doesn't do justice to the investors to put in one side of it and not the other side of it when we have good visibility to the other side of it. So it is not an expectation that the acquisitions are under contract.

So it really is -- we pre-funded some things, we have the capital. When you really look at giving people some real visibility into our expectations, that seemed to be the best way to do it.

We do feel good about portfolio performance as well which is, as I mentioned, another reason to increase the guidance.

Very fair response. Thanks, Debbie. Thank you, everybody.

Tayo Okusanya, Jefferies.

Yes, good morning, everyone. Sorry to beat a dead horse, but in regards to just acquisitions, you have talked about the broad breadth of things you are looking at. Could you also talk about deal size in regards to -- is this mainly smaller deals from your regional operators? Is that where a lot of this potential transaction activity could come from?

Or are there, again, some (multiple speakers) transactions?

Yes, I mean if you look at it kind of vertically and horizontally, I would say that the deal size varies from a single asset to very, very large. And the asset types, if you go across, are more multiple asset types in senior housing and healthcare. So continues to be a very wide spectrum.

Okay. Are you surprised, though, Debbie, that since January or so there have been a couple of really big deals people have been talking about, but none of them have really closed. Has that surprised you?

I would repeat what we always say, which is that it is absolutely impossible to predict with any kind of accuracy the timing or volume of investments. Everything is in its own due time for a whole host of different reasons.

So, no, I am not. I think it is very consistent with what we think.

Okay, that's helpful. Second question. Could you give us a sense what you are generally hearing about Medicaid rates for the skilled nursing portfolio, what is happening on that end?

Yes. We typically predict a plus or minus 1% to 2% in any given year. We are hearing that some states are having some significant increases actually, although in general we tend to keep it -- our projections for Medicaid in, as I said, the plus or minus 1% to 2% range on average as you look across all the different states.

Okay, but have you heard from any state so far where the news is maybe a little bit more negative than you were anticipating?

No, I wouldn't say that.

Okay. That's helpful. Then the last thing from my end, just the medical office building portfolio. When I take a look at some of the same-store data, it does seem like same-store NOI did come down sequentially as well as year-over-year.

Could you just talk a little bit about that specifically, some of the year-over-year occupancy loss that may have happened?

Yes. Tayo, I think on the year-over-year occupancy loss, those are just forecasted and budgeted moveouts. It is really the timing of when leases will move back in or new leases will move back in.

Same thing I think with the results. I think you really -- with the medical office and the timing of the expenses and the recoveries, you are going to get some variability between the quarters. I think that is what you saw between the first and the second quarter.

And that is, quite frankly, why I wanted to make sure people understood in my comments in the first half that same-store cash NOI was up 2.6%, but in the quarter it was a 1.4%. So you can get a sense for some of that variability.

Okay. That is definitely helpful. Then what about the mark-to-market on rents in the MOB portfolio? What is that looking like right now?

It's positive. We are seeing positive net leasing spreads in the market.

In low single digits like 2%, 3%, or higher?

Yes, low single digits is fair.

Okay. Great. Thank you very much.

Karin Ford, KeyBanc Capital Markets.

Hi, good morning. Do you guys expect any more loan repayments or dispositions for the balance of the year? If so, are they factored into guidance?

Not a material amount, but if we do expect them they are factored in.

Okay. My second question just relates to your appetite for hospitals. I know we talked a little bit about that on the last call.

Then since then, a proxy that came out from Vanguard Health Systems said that a couple of healthcare REITs had made bids on that company, which is relatively sizable. So could you just talk about Ventas's appetite for a hospital investment of that size? Is that still something that you guys would consider?

Yes, we did talk about hospitals last quarter. And I mentioned that over time, big-picture, long-term secular trends, we really do believe that real estate assets will flow to the most efficient owners, and that you are seeing a lot of consolidation and change in the hospital business, and that that may create opportunities to commit capital.

I would say that we are very well positioned with Todd's business. He has been serving high-quality healthcare systems for 25 years, and we have a lot of expertise within the firm that we would consider a capital allocation to the hospital business with the right partner, right pricing, and structure.

And it may never come to pass, but it is a sector that I think is large and interesting as you look at healthcare and healthcare reform going forward.

Thank you.

Nick Yulico, UBS.

Thanks, good morning. I just had a question, a couple questions. First on senior housing, the operating guidance for the year. You guys are now at the midpoint essentially; it seems like you are running year-to-date at the midpoint of that guidance. The occupancy is down at the end of the second quarter versus where it ended last year.

So what I am wondering is, at this point is there really any chance of making the low end of that guidance? Since you guys seem to be pretty positive on how you are thinking about occupancy going into next year.

Nick, you changed your jersey. Congratulations.

Thank you.

You went from Australia to Switzerland. Anyway, Ray is going to answer but I would say that again we provided a range, $430 million to $440 million, where we are right on track with our expectations. And we do believe the portfolio is and will continue to perform well.

Yes, pretty much what Debbie said. I think the only other thing I would add to that is that, as I mentioned, we have seen occupancy follow normal historical seasonal patterns and trending upwards heading into the third quarter. So --

I mean expenses do go up in the third and fourth quarter.

Absolutely.

As we talked about before. So that is a factor.

Yes, I mean expenses will pick up in the third and the fourth quarter. Third quarter is particularly heavy on utilities because of the air conditioning; and also vacations in the third quarter.

Not ours.

Not ours, unfortunately. But so -- yes, I think that is right. Look, we're comfortable with what we have provided in guidance.

Okay. So it is not just an occupancy issue. So even if I were to assume, say, that your occupancy could get back to where it ended last year for that portfolio, there may be some expense offset on that?

Yes, I think that is right. Again, as I said, all of the projections or assumptions that we based our guidance projections on are tracking right in line with our performance through the first half of the year.

Okay, great. Then just lastly on the FFO guidance for the year. Is there anything that is dilutive in there in the back half of the year? Say like an unsecured bond raise to take down the line of credit, or is there any pull factor versus what you guys have done in the first half here?

Yes, the line of credit is down in the $200 million to $300 million range. We haven't factored, as Rick said, any capital raises into our second-half guidance.

There were sales at the end of the second quarter that are dilutive relative to the second half, that $160 million that we mentioned. And we have, of course, factored that into account.

Okay. Perfect. That's all I had. Thanks.

Michael Carroll, RBC Capital Markets.

Yes, good morning. Within your senior housing portfolio, is there a meaningful difference between the performance of the Class A assets and the Class B assets?

Within senior housing, again, the distinction that we would make is that in our senior housing operating portfolio with Atria and Sunrise we are seeing high single-digits growth rates pretty consistently. And those are the best assets in the best markets.

So that has really been a market-leading portfolio, I would say, consistently outperforming industry statistics. So that high-end outperformance really has continued.

Yes, Michael, just to add on to that, I think where we have the assets in our triple-net lease portfolio, the growth rate has been less but the performance has been very stable.

Yes, and as expected.

And as expected. So I think it is fair to say that our seniors housing operating assets grow at a better rate by virtue of the quality of the buildings.

Okay. Then within, I guess, the triple-net portfolio -- it sounds like the senior housing portfolio is a little sheltered from new development activity. Are you seeing more development activity that could compete against your triple-net portfolio?

No, not particularly. Just to remind everybody, the triple-net portfolio are typically pooled multi-facility master leases that will have additional structural and credit support through guarantees and security deposits, etc.

When we look at the construction across the country, we have a highly diversified portfolio there. We don't really see any major flashpoints in construction against our triple-net portfolio.

There are some smaller markets out there where you would look at it and say -- wow, there's 20% construction as a percentage of inventory. And then when you actually dig into the numbers, you realize that it is one building that is being built, and there is just not a lot of inventory in the market. Occupancies are 90%.

So I think it is really important to, again, do the analysis that gets a little more texture around the construction data.

Okay. Then the coverage ratio in the skilled nursing facility portfolio declined again modestly I guess from the fourth quarter to the first quarter. Is that ratio stabilized now? Could we expect to see any improvement? Or is it going to stay around that range?

I think that it's -- you can expect it to be around that range at least in the near term as -- again, healthcare reform. A lot of the post-acute really comes from hospitals, and so you have to look at hospital volumes, and you also have to look at the fact that the providers are increasingly shortening length of stay. So that has an industrywide effect on occupancy levels.

So I think you should expect it around here.

One other thing within our portfolio is we dropped off the first quarter of '12 from our trailing-12 statistics, which was probably Kindred's best quarter of recent memory.

Okay. Then my last question relates to the acquisitions that are under contract and completed. Can you break out the percentage between that of senior housing, medical office building, and possibly loans that you may have made?

Okay. They are all equity investments, and I would say that other than maybe $100 million it is private pay senior housing.

Okay, great. Thanks, guys.

Thank you. You have no questions at this time. I would now like to turn the call over to Debra Cafaro for closing remarks.

Thank you, Julia. I want to thank everyone for joining us this morning. As always, we sincerely appreciate your interest in the Company and your support of Ventas. We hope everybody has a great rest of the summer and look forward to seeing you again soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.