芬塔 (VTR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Ventas earnings conference call. My name is Ian 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, the call is being recorded for replay purposes. I would now like to turn the call over to Ms. Lori Wittman, Senior Vice President of Capital Markets and Investor Relations. Please proceed.

Thank you, Ian. Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the quarter ended September 30, 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 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 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 on 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. Good morning to all of our shareholders and other participants, and thank you for joining Ventas' third-quarter 2013 earnings call. I'm happy to be hosting today's call with many of my Ventas colleagues in the room as we discuss the positive results of their terrific work.

At Ventas we are focused on delivering consistent superior results. This quarter our performance was strong as we executed across our three pillars of excellence -- raising capital effectively, allocating capital wisely, and managing our assets productively.

Following my brief comments on our outstanding performance, our investment and other activities in the quarter, our increased guidance and the external environment, Ray Lewis will discuss our portfolio and Rick Schweinhart will review our financial results. Following our remarks we'll be pleased to answer your questions. Let's start with an overview of Ventas.

At September 30 our pro forma NOI and enterprise value were approaching $1.8 billion and $29 billion respectively, as we continue to execute our strategy of providing investors with consistent superior cash flow growth coupled with financial strength and active risk management. At Ventas we remain committed to playing offense and defense so that we can thrive and outperform over the long-term.

We also know that near-term results matter as well. This quarter we reported record profits at $1.04 a share in normalized FFO. This represents growth of 10% per share compared to last year, excluding non-cash items, and over 8% as reported. Equally important, year to date we have already generated almost $200 million in operating cash flow after dividends and recurring capital expenditures.

Turning now to capital allocation, since July 1 we have closed nearly $1.3 billion in attractive accretive private pay acquisitions. About $1.2 billion in our deals closed during the quarter, with a weighted average closing date about September 1. With the blended going in cash yield of about 6.25% and expected cash flow growth of 4% to 5% in the next few years, the first year reported yield on these investments approximates 7.3%.

Here are some of the highlights of our investments. We invested about $360 million in eight high-quality senior housing operating investments transitioned to Atria at the time of closing. We also invested just shy of $800 million in independent living triple-net leases with a new tenant. And finally, we allocated $120 million to medical office building investments.

The Atria managed senior living communities we acquired contain 940 units, are 91% occupied and are located principally in the top 31 MSAs. Home values in the areas where these communities are located boast median single-family home values of over $325,000, which is 90% higher than the national median. And seniors represent a very high percentage of the local population.

The triple-net lease independent living portfolio we acquired consists of 26 communities containing 3,138 apartment like units principally in the top 100 MSAs. These assets are 94% occupied and generate over 50% EBITDAR margins. We project 2.3% compound annual growth in the senior population in these areas during the next five years, which is also higher than the national average.

The eight medical office buildings we acquired are high-quality assets located on the campuses of existing hospital clients that are single A or better rated hospital systems. They contain about 430,000 square feet and are 90% occupied.

Turning to capital raising, we continued to be opportunistic and also defensive in the capital markets this quarter to maintain significant liquidity and financial strength while we grow. Since July 1 we have raised about $900 million, principally in the fixed income market.

Late in the quarter we raised $850 million in debt capital at a blended rate of 3% and a weighted average maturity of 12.5 years. With this deal we reduced our weighted average effective interest rate to 3.8%, materially lengthened and staggered our debt maturity schedule to almost seven years, and maintained $1.6 billion in liquidity. At the same time our balance sheet remains in terrific shape at 32% debt to enterprise value currently.

Our third pillar of excellence is managing our assets productively. During the quarter we completed excellent proactive agreements with our customer, Kindred Healthcare, regarding our 2015 lease expirations. And we drove continued strong property level results through our large diverse portfolio.

As a result of all of our activities, we are very pleased to increase our full-year normalized FFO guidance to $4.12 to $4.14 per share. At the midpoint of our upwardly revised range, our per share growth would be 11% excluding non-cash items and 9% on an as reported basis.

With a current dividend of $2.68 per share this year, our normalized FFO payout ratio is 65% of our new midpoint of guidance and 67% excluding non-cash items. With this strong metric, we have the opportunity to continue our strong track record of dividend increases as we move into 2014.

Finally, just a note on the macro environment. Our various healthcare and senior housing sectors continue to change, consolidate and converge at an incredibly rapid pace. We are actively engaged across the board on investment opportunities of all sizes and types. I continue to believe that the opportunities in our $1 trillion healthcare real estate market are immense and that the investment dynamics in our sector remain constructive.

With our team, cost of capital, track record, portfolio, relationships and intellectual capital, we feel confident about our ability to grow and create value. We are incredibly well-positioned to deliver consistent superior results, capitalize on a dynamic healthcare and senior housing environment and expand our excellent franchise. With that I will turn the call over to Ray Lewis.

Thank you, Debbie. With the investment activity completed so far this year, our balanced and diversified portfolio now stands at 1,476 seniors housing, medical office and post-acute properties. Our productive portfolio delivered year-over-year same-store cash NOI growth of 4.2% adjusted for a couple of out-of-period cash payments received in the third quarter of last year.

Today I will briefly run through some of the third-quarter portfolio highlights, starting with our seniors housing operating portfolio. Our total SHOP portfolio now stands at 236 properties as nine new properties were added to the SHOP portfolio since July 1, all managed by Atria. These best-in-class assets are in great locations around major metropolitan areas including Los Angeles, San Francisco, Miami, and Sacramento.

Occupancy in the 212 properties in our same-store portfolio increased by 110 basis points year over year. And occupancy in the 220 communities that we owned in both the second and third quarters of this year was up 60 basis points sequentially. Occupancy growth in our same-store SHOP portfolio outperformed the growth reported in the NIC top 31 MSAs by 60 basis points year over year and 30 basis points sequentially.

REVPOR increased 3.6% in the same-store portfolio year over year and was stable sequentially. Variable expenses were higher in the third quarter over the second quarter due to increased occupancy, and fixed expenses increased due to seasonal utility costs resulting in some margin compression. This is a typical seasonal pattern which we predicted on our call last quarter.

Same-store NOI growth in the portfolio totaled 4.4% year over year. However, if you take out the previously mentioned property tax settlement received in the third quarter of 2012, year-over-year NOI growth normalizes to 6.2%.

Finally, our new Atria development in Cape Cod, Massachusetts opened up this August. This state-of-the-art 125 unit IL/AL property is leasing up well ahead of schedule and is projected to be 50% occupied by the end of this month.

We continue to actively redevelop both our SHOP and triple-net portfolios and have a pipeline of terrific opportunities to expand existing buildings, add new programming, and renovate units and common areas at above average returns. We currently have nearly $150 million of redevelopment projects under construction in our SHOP portfolio with another $200 million in the pipeline of potential opportunities to drive future growth.

So our SHOP portfolio continues to perform well and meet our expectations for the full year. With the continued strong performance of the same-store portfolio and the 2013 SHOP acquisitions, we are providing a new 2013 NOI guidance range for our total SHOP portfolio of between $447 million and $451 million. This new guidance includes the impact of the 15 new properties acquired so far this year, as well as about 5% to 6% year-over-year NOI growth on an as reported basis in the same-store portfolio for 2013.

Next I will turn to the performance of our consolidated triple net lease portfolio, which is diversified across 876 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 third quarter was up 2% year over year and 1.1% sequentially. Adjusting for some out of period cash receipts in the third quarter of 2012, the same store cash NOI growth rate is approximately 3.5%.

Cash flow coverage in our same-store triple net lease portfolio for the second quarter of 2013, the latest available information, was strong and stable at 1.6 times. Coverage in the seniors housing triple net portfolio and SNF triple-net portfolio also remained stable at 1.3 and 1.6 times respectively.

Our seniors housing triple-net portfolio saw strong occupancy growth in the second quarter, increasing 100 basis points year over year and 40 basis points quarter over quarter, outperforming the NIC data for the same periods.

As Debbie mentioned in her remarks, we are extremely pleased to have announced the favorable agreement with Kindred on the 2015 lease renewals. Kindred has agreed to release 48 properties and to increase rent by a total of $15 million beginning on October 1, 2014.

With the completion of this transaction, Ventas has already replaced $93 million, or 67%, of the $138 million of Kindred rent that was up for renewal in 2015. Kindred also made a $20 million upfront payment to Ventas in connection with these agreements.

As part of this transaction, the companies agreed to accelerate the lease maturity date to September 30, 2014, with the ability to transition sooner as new leases are executed. This is beneficial for both companies, allowing Kindred to accelerate their integrated market strategy and Ventas to immediately begin the re-leasing process.

We are already in the market with the 60 properties and, like last time, we've received significant interest in these productive cash flowing properties. When completed these transactions should have an immaterial impact on Ventas' 2014 and 2015 results and will improve our diversification, with Kindred representing just 6% of our revenues.

I would like to finish with a few comments on our medical office building. At the end of the third quarter our consolidated MOB portfolio consisted of 310 properties spanning nearly 17 million square feet and accounting for approximately 17% of our annualized NOI. These high-quality assets, of which 96% are on the campuses of or affiliated with highly rated health systems, continued their strong performance in the second quarter.

Cash NOI for the 254 same-store properties was a solid 2.3% year over year in the third quarter. Performance was driven by a 2% increase in rates and a 70 basis point increase in margins, offset by a 50 basis point decrease in occupancy from budgeted moveouts in the third quarter of this year.

Sequentially, cash NOI growth in the 301 property same-store portfolio increased a strong 1.2%. Occupancy in the 287 stable properties, which we owned in both the second and third quarters of this year, was a solid 91.4%. We also continue to make good progress with our lease-up assets, with occupancy in our lease-up portfolio increasing 350 basis points versus last year.

Finally, we continue to execute and deliver strong bottom-line growth by driving rates and managing expenses at our medical office properties. During the third quarter we completed the acquisition of seven MOBs on the campuses of Chicago area hospitals affiliated with a AA rated Advocate Health Care System. We now have 15 buildings with over 750,000 square feet affiliated with Advocate.

This transaction further demonstrates the value of our highly rated health system relationships while leveraging the scale and driving operating efficiencies in our Chicago market portfolio. So all in all, the portfolio turned in a very strong performance across the board in the third quarter. And we continue to focus on pursuing excellence in our asset management and portfolio operations.

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

Thank you, Ray. Cash flows from operations were $328 million, up 32% from the third quarter last year. Dividends were $198 million, producing a net of $130 million available to invest. In the third quarter we had approximately $1.2 billion in real estate investments.

In addition to the cash flow, we raised $850 million in senior notes with a weighted average interest rate of 3% and a term of 12.5 years, which helped fund our acquisitions. We also received proceeds of $86 million from asset dispositions, loans syndications and loan repayments.

We issued approximately 375,000 shares, raising $24 million under our At-the-Market program in addition to the $82 million raised in the first and second quarters. We assumed mortgage debt of $115 million at 5.5% as part of the acquisitions, and paid off $143 million of secured debt at 5.5% with a GAAP rate of 4.8%.

With all of the sources of funds, we only borrowed $188 million on our revolver. Our revolver balance at quarter end was $448 million. We currently have unrestricted cash of $63 million and over $1.5 billion in borrowing capacity available on our revolver.

Now let me focus on third-quarter results. We achieved our highest profitability ever this quarter. Third-quarter 2013 normalized FFO was $1.04 per diluted share, an increase of 8.3% compared to the third quarter of 2012 per share results of $0.96. Normalized FFO increased 7.8% to $307 million compared to last year's third quarter of $285 million.

Third-quarter 2013 normalized FFO increased from last year's third quarter due to our last four quarters' investments of over $2.7 billion, NOI increases in all three of our segments, a loan recovery and lower weighted average interest rates, offset by higher debt balances from our acquisition activity, asset and loan sales, and receipt of loan repayments.

Our average cash interest rate improved 50 basis points to 3.9% at September 30, 2013, compared to September 30, 2012. And we have been able to lengthen our weighted average debt maturity to 6.8 years from 5.7 years compared to last year. Weighted average shares outstanding for the third quarter were 295 million shares, down 1% compared to the third quarter of 2012.

At September 30 our credit stats remained outstanding, with net debt to pro forma EBITDA at 5.6 times, our fixed charge coverage ratio in excess of 4 times, secured debt to enterprise value of 10%, and debt to enterprise value at 34%.

On August 26, Moody's upgraded us to Baa1 from Baa2. We are currently rated BBB+ by Fitch and BBB positive by S&P. We are increasing our 2013 normalized FFO per diluted share guidance to $4.12 to $4.14, from $4.06 to $4.10. The midpoint increase is to $4.13 from $4.08, the midpoint results in growth of 9% in normalized FFO per share. 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). Emmanuel Korchman, Citi.

Maybe if we can talk about the deal that -- or the deals that you completed this quarter. How many of those encompass the pipeline that you had coming out of 2Q -- I believe it was a $400 million pipeline -- or what happened to those deals?

Those deals are in the $1.3 billion.

And do you have a similar sort of pipeline number that you can share with us going forward?

As you recall, we provided forward acquisition guidance last time for a specific reason because we had raised the capital in the first quarter and we thought it was important to give you visibility into things that we had under contract. Because we essentially pre-funded those with the capital raises that you could see.

So typically, we do provide guidance in terms of forward earnings without additional acquisitions or capital transactions, and that is what we have done here. But I can assure you, as you could tell from my remarks, we continue to be very active in looking at potential investment opportunities.

And then on the senior housing assets that were transferred to Atria, what kind of upside --.

Yes.

-- have you typically seen in sort of that type of transfer from maybe a smaller operator to the Atria platform?

Could you repeat the question, Manny? I'm sorry.

I said what kind of upside could we expect to see, whether it be that pool of assets or the assets you transferred to Atria the last time?

Yes, I mean we have a competitive advantage when we acquire these kind of high quality assets and transition them to Atria because, as you know, we own a third of the management Company. And so we have a slight competitive advantage because we get essentially a third of the management fee. But in addition, we are acquiring very high quality assets, and we would expect those assets to grow kind of 5% plus or minus 1% or 2%, depending on where we are in the market cycle.

So, Manny, this is Ray. Part of the upside in these assets is that they are primarily independent living properties. So the ability to add some additional programming as we move forward could drive some potential upside in those buildings. But that is down the road.

Perfect, that is it for me. Thanks, guys.

Juan Sanabria, Bank of America.

Good morning, guys. I was just hoping you could give a little bit more of a color or breakdown on the deltas in the guidance for FFO, the $0.05 increase to $4.13. What was related to the acquisitions you did, the $1.3 billion? And if anything, what was related to the change -- slightly lower, I guess -- range for the same-store SHOP portfolio?

In general most of the fourth-quarter and guidance increase is due to acquisitions or some other offsetting things, but those sort of come out in the wash. So it is principally the benefit of the acquisitions and the very favorable capital raise that we did at the end of the third.

Now what drove the change on the high end of the SHOP same-store guidance? I'm assuming you knew about the third-quarter 2012 sort of one-time tax. So I'm just a little curious, given it seemed like occupancy was strong and REVPOR was up, why the lower range for SHOP assets?

Yes, I think there is a couple of things that are going on in there, Juan. One, we have got three redevelopments in the portfolio this quarter versus 12 last year. So we are sort of at a little bit of nadir in the redevelopment pipeline, but we are gearing that up, as I mentioned in my comments.

I think Atria continues to perform very well. And a little bit of underperformance perhaps in the Sunrise portfolio in Canada in particular, where we had some FX as well. And that I think accounts for most of it.

Do you see that sort of new range for the RIDEA portfolio as sort of a good run rate to assume over the medium-term? And if possible, could you break out sort of the components; what would be an occupancy rate and margin sort of component of that guidance?

I mean I think this range is pretty consistent with what we said when we originally acquired the portfolio, the portfolios three years ago when we said these things are going to run in the 4% to 7% range. So I mean I think this is fairly consistent with what we have projected over the long run for these assets.

And could you give Juan just a little bit of color in terms of how seasonality typically would work in the fourth quarter versus the third in the senior living business?

Sure. So in the fourth quarter what you will typically see is declining occupancy throughout the quarter as you head into the holidays. I think typically you will see that people just aren't moving their family members into buildings around the holidays.

And then there is always sort of a year-end rush to get some of the repairs and maintenance completed that have been scheduled, and that typically leads to a little bit of margin compression in the portfolio. So we would expect that through the balance of the year, the properties will perform similarly to how they have performed in the third.

Thanks.

Great, thanks, guys.

Michael Carroll, RBC Capital Markets.

Can you guys give us a little bit more color on the $800 million independent living investment? And I'm sorry if you mentioned this, but did you name the tenant and is there expansion opportunities with that tenant?

Good morning, Mike. The tenant is named in our supplemental and it is Holiday Retirement, which, as you may know, is one of the largest senior living owners in the US.

And do you expect more I guess investments with that tenant going forward?

Well the good news about our business and our business model, and I touched on this a little bit in my remarks, is that almost all of our important tenant operators in the MOB business, the hospitals, they all own in general lots more real estate. And so I think whether it is our new tenant, Holiday, who we welcome to the fold or our existing tenants, I do think there continues to be lots of opportunity to acquire real estate over the coming years.

Okay, then how will expanding the Atria platform impact your ownership position? I believe the managers' cash flows are relatively modest right now, but there is a lot of opportunities to add scale. Can you expect this to hit your P&L more meaningfully in the future as that continues to grow?

It would be immaterial, but at the margin it just does give us a little bit of a competitive advantage on assets that Atria can operate and it helps them develop scale. As you mentioned, they are built to grow and so that is important. And also these assets were squarely in their existing market, so that helps with the market concentration and penetration as well.

Okay, great. And then my last question would be with regards to your development activity, can we expect $40 million in starts a quarter would be a good run rate going forward?

You know, I think we have got, as I said in my remarks, about $150 million that is sort of under construction right now, and another couple of hundred million dollars in the pipeline. That pipeline number has been fairly consistent. It is really going to depend upon what is sort of shovel ready at any one point in time. But, yes, I think based on that pipeline, that is a reasonable assumption.

Right. But it will kind of have -- because of permitting and things like that --

Right.

Of course.

-- like any development, it will ebb and flow. So a straight-line assumption is probably the best you can do, but it will inevitably be incorrect.

Right.

Great, thanks, guys.

Jack Meehan, Barclays.

Just wanted to start with the SHOP portfolios. So now that you are 91% plus occupancy, do you think there is room for additional pricing improvement on top of the 3.6% you reported this quarter, or is that ultimately some limit to that growth?

No, I mean I think as you start to get into the fully occupied zone of 93%-94%, that is when you can really start to test pricing. That is when you start to get waiting lists that will build up in your buildings. And that is when you can really sort of push a little bit to see what the market can support. So I do think there is more pricing upside.

And do you think there is a range where that ultimately starts to plateau?

The pricing?

Yes.

Well, no. I mean, again, I think it is a supply/demand equation, right? So I think if you look at the marketplace right now, occupancies are pretty strong. And so, we should be at a point where we can push pricing. So, no, I don't think that is constrained in any way.

And just to follow on that, if you look at what seniors are getting in terms of the high-quality product, and if you assume maybe it costs $5,500 or $6,000 a month for all your housing, insurance, maintenance, meals, etc.; most of the seniors, certainly in the areas where we talk about where we have the assets in the SHOP portfolio, can well afford the $72,000 a year for the one to three years that they may be living in these communities.

So, there is not pressure from an affordability standpoint. In fact, I think they are quite affordable for the population that the communities serve. And actually are a great value proposition for those seniors.

Okay, and then the range for the fourth-quarter SHOP guidance is $4 million top to bottom; that is a little bit wider than we were last year. So I'm guessing just what are you embedding that will get you to the top end of that range versus the lower end? Is that related to the development or the lease-up of the new Atria?

Well, I think there are a number of things in there. One, if occupancy doesn't tail off and if the expenses don't materialize, you could find yourself at the top end of the range, and vice versa.

Okay. Thanks, guys.

Jeff Theiler, Greenstreet Advisors.

I had a question on the senior housing operating portfolio. Year-over-year expense growth was a little bit higher on the stabilized portfolio than we have seen in the past at 5%. Can you comment on what is driving that and what your expectations are for expense growth and margins going forward?

Was that year over year that you were asking about, Jeff?

Yes.

I mean, I think when we looked at the numbers, one thing that did jump out is it was a pretty high utilities year this year, pretty hot summer. So that would be part of it.

I think there was also a $1.7 million last year in the numbers that was an out-of-period expense reduction, so that probably affected it as well.

Okay. Okay, and then on the skilled nursing side, just looking at the occupancy, I understand the trend is for lower occupancy in skilled nursing going forward as you move to a higher acuity model. But the portfolio seems to be dropping pretty quickly and significantly below your peers' skilled nursing portfolios. Is that something you are concerned about or keeping an eye on or what is going on there?

Well, I mean I think when you look at the occupancies, that is consistent with industry trends generally. I think the coverage has remained stable, the operators are able to generate higher revenues per day from these post-acute short stay patients, which are the primary cause of the occupancy drop. So, look, we worry about everything, but as we look at the numbers, they seem to be pretty stable.

Okay. I guess along those lines, we have seen some of your peers start providing enhanced disclosure on their triple-net lease portfolios either through heat maps or just stratifying the coverages in a little more detail, so investors can get a better sense of what is underlying those summary statistics. Is that something that you would think about including in future disclosure?

Jeff, we are considering and looking at enhanced disclosure for the end of the year.

Okay. Fantastic. Thanks so much.

Rich Anderson, BMO Capital Markets.

Just a question first on Holiday. I'm curious why that -- was that a one-time like you did it all at once? Or did that kind of happen over the course of the quarter? I am curious why we didn't hear about it until now. Was there a disclosure issue on their side or --?

It happened all at once. It was a single deal closing.

I know -- I mean that is kind of interesting, right? We were all waiting to see what happens with Holiday. I'm just curious why you held back. Was there any legal issues why you held back?

No -- I mean we like to announce all of our activity in a single -- so everybody has context and transparency into all the different things that we are doing. So this is our big tah dah, so -- of everything in the quarter, so here it is.

Okay, okay. I am curious when you think about your pipeline, which you know is obviously still active, how much is life science still represented in that pipeline in your mind?

Again, we look at all the healthcare and senior living assets across the board and wouldn't exclude anything, but the pipeline itself is really across all asset types, I would say, including life sciences.

Do you have any change in your view about life science from past comments in conference calls?

I think we have been very consistent about it. I could press Ray Lewis in the arm and he could say the same thing over again.

I won't put you through it, Rich, I won't put you through it.

But we think it is a good asset class and if we ever found a good opportunity to invest, then we would.

Okay. How much, if anything, did rising interest rates and your stock price moving over the course of the second quarter impact pricing of deals, your appetite for deals? Can you give us some color on that -- on this $1.3 billion that you have been able to achieve since July?

Yes, I am glad you asked that. I think it is really important to put the whole cost of capital in perspective. As we have had some volatility this year in the markets, I think we took an opportunity to step back a little bit and make sure that we were kind of building and managing the business with a realistic and consistent view of the world and the capital markets and our cost of capital.

So while we love the market exuberance between March and May, we certainly don't build our business around that. And we believe that the environment for investing when you take a good perspective on it, it is still quite constructive. And we are continuing to lower our cost of debt and we feel good about where we are in the world.

I think it is very important to understand that we don't make decisions based upon a two-month stock price. We make decisions based on, and we manage the Company based on, a very consistent view of the world.

And that has been very successful for our investors. As my mother said, don't get carried away, one way or another. So we try to really take a mature view of the markets despite kind of near-term phenomenon.

Okay. And then the last question for me is --and maybe for Ray -- in your markets from a senior housing supply perspective, are you getting any elevated concern looking out a few years about new development?

Yes. So, this has obviously been a big topic in the industry in the NIC calls. Look, I mean I think over the long run everybody would agree that seniors housing is the best market demographically. It's where you want to be; that is where the growth is. But let's talk about the construction. As I said earlier, we worry about everything. There is maybe 16,000, 17,000 seniors housing units under construction. And to put that in perspective, there are 17 million people over the age of 75.

So it doesn't necessarily seem like a lot of construction, but as you point out, you kind of have to look market by market. And when we sort of bump our portfolio up against the markets, say the top five markets where you are seeing the largest increase in the percentage of inventory, that is maybe about 3% of our total SHOP NOI.

So we have said all along our assets are in high barrier-to-entry infill locations; that is true. That provides us with some insulation against the construction, but just like everybody else in the industry, whether it is our existing portfolio or new acquisitions, we want to understand what is going on in our markets with respect to construction.

Okay, sounds good. Thank you.

Nick Yulico, UBS.

Just going back to the Holiday deal, could we get the annual escalators, the lease term and the coverage on that?

We generally would say that the -- that that lease is going to be straight line because of the way it is structured. And that you could expect, since that is a big part of our $1.3 billion in acquisitions that we announced, that the kind of near-term cash flow growth rate, which would really be the escalators, would be in that kind of 4% to 5% range along with everything else.

Okay, so the escalators are somewhere in that 4.5 -- I'm sorry, 4% to 5% range. What about the lease term and the coverage?

Well, again -- hey, Nick, when you look at the $1.3 billion of acquisitions, if you look at it, what we said is in the first couple of years we would expect kind of 4% to 5% growth and Holiday is a big component of that. So that is the way I would think about it, kind of all together.

Okay, what about the lease coverage and the term?

The lease coverage would be relatively consistent with our existing senior housing triple-net portfolio.

Okay, and the lease term?

15 years.

15 years, okay. So essentially then, that deal was a low 6% type going cap rate, is that right, on a cash basis?

Everything is about a 6.25%, yes.

Okay. And then just going back to -- I mean if there is -- I mean it is no secret that there is another -- we estimate about $6 billion of real estate still at Holiday. What is -- I mean how are you guys thinking about that opportunity? I mean this was clearly a portfolio of assets that they sort of wanted to do initially. I mean would you be comfortable doing another sizable deal on a triple-net basis of similar economics to what you got here?

Well, this is a very good portfolio. Again 94% occupied, good EBITDAR margins, over 50%. We are very happy with the acquisition. And again, with all of our tenants and operators, they own -- or most of them anyway -- they own significant amounts of additional real estate.

And hopefully if we do a good job and we think that they are a good operator, there will be follow-on opportunities, and we will evaluate all of those in the context of our business strategy. And we are hopeful that there will be a sort of quasi proprietary pipeline with many of our tenant operators over time.

Okay, great. Thanks for that. Just one other quick one. If I look at the -- I know you don't give AFFO guidance. But if I look at the FFO guidance going up $0.05 like you said at the midpoint for the year, it sounds like that was mostly due to the acquisitions. What would the AFFO type of impact be relative to that (multiple speakers)?

Yes, well, obviously, as we have talked about over the years, there are pros and cons to the senior housing operating acquisitions, pros and cons to triple-net leases. I think given that $800 million of the $1.3 billion of acquisitions is in triple-net lease, the FAD impact of that would obviously be more favorable because the tenant pays CapEx on those types of acquisitions. So that is one thing to look at.

If you do look at our supplemental, we have a pretty extensive disclosure at the end that gets you to kind of pre CapEx, AFFO. And then we have another disclosure that talks about recurring CapEx. So I think we can talk to you off-line, and be happy to do that, to get you down to what you may be defining as your AFFO.

Yes. No, I am saying relative to the acquisitions you just did. I mean if you're saying you did a 6.25% cash versus 7.3% GAAP what, is the sort of rough difference that you guys see as far as AFFO impact on that?

Well, AFFO should go up.

Okay. So up, but not as much as the FFO?

Correct, because the triple-net lease would be straight line, correct.

Okay.

But AFFO will definitely go up.

Right, okay. All right, thank you very much, take care.

Tayo Okusanya, Jefferies.

Congrats on the Holiday deal, that was a pleasant surprise. I guess just kind of going to the senior housing issue, Ray, and I know you just kind of gave a couple of comments. When we were also kind of looking at this issue, there are some markets that have a lot of new supply coming on. And it sounds like you guys have done some initial analysis around this.

When I still look at your supplemental and I look at some of the exposure you have to markets like Texas, Ohio, Florida, and I compare it against the NIC data where there are specific MSAs that have meaningful supply coming online in some of the MSAs in these states; I mean, can you get us a little bit more comfortable that your stuff really is not in those MSAs, although your assets are in those states?

Yes, I mean I think as I mentioned last call, Tayo, our single largest market is the New York Metro area, and that accounts for 20% to 25% of our entire SHOP NOI. There is no other market that accounts for more than 4% of our NOI. So we have a highly diversified portfolio.

And again, I will go back to if you looked at the top five markets where -- or the five markets where the percentage of inventory is increasing the most, that accounts for about 40% of all of the construction that is going on in the industry right now. And that accounts for about 3% of our NOI.

So again, it's something that we watch very closely. And then within each one of those markets, you kind of have to look at where the assets are being built relative to where our assets are located.

And what type of construction versus what type of asset.

And what type of construction versus what type of asset that we have. So it is a highly granular analysis. But at the moment as we look at what is going on in the industry, we believe our assets are well-positioned.

Okay. That is really helpful color. Going forward from a disclosure perspective, would you consider splitting up your senior housing disclosure into the triple-net and also the operating stuff like HCN does?

We are looking at some increased disclosure. We do divide up in our supplement already for the SHOP information, so --.

But do you give the SHOP by state? I don't --.

No, we are looking at that, though.

Okay. Because I think that would -- because I think HCN does that, and I think it would just kind of be helpful as people kind of really focus in on this issue of new upcoming supply.

Yes.

Thank you.

Thank you very much, good quarter.

Daniel Bernstein, Stifel.

I have a follow-up question on the construction in seniors housing. You mentioned before, obviously, that New York City is a big component of that and I agree. I don't see any real serious threat in construction where you have the SHOP portfolio. But the number of lenders are picking up in the business, and clearly construction is probably going to filter to other geographies.

Does any of the construction in seniors housing force you to reconsider maybe any of the strategy of the mix of triple-net versus RIDEA? I'm sure Holiday was more opportunistic. But do you think about any change in RIDEA versus triple-net mix?

Hey, Dan, that is a good question. And I think what we have said very clearly for a long time is that we strongly believe in a balanced portfolio. And that is what we have tried to create and that is what we are constantly recalibrating.

I think that when you have a diverse and balanced portfolio -- and by that we mean by tenant, by operator, by asset type and by business model, which is what you are focused on -- I think if we maintain that balance, we are going to be able to deliver consistent superior results.

And as you could see this quarter, we did do -- of our $1.3 billion, we did do just under $800 million in triple-net. And so we are keeping that balance in mind as we make acquisitions. And so I think you are making a very good point.

Are the sellers of assets -- I mean, what prompted maybe Holiday to think about triple-net versus RIDEA? Because a lot of the private equity sellers have really been pushing for that RIDEA structure, but clearly triple-net is still a viable structure as well. I don't know if you can speak specifically to Holiday because of disclosure, but what is the seller's decision process in terms of RIDEA?

Let me speak just generally about the Ventas strategy. So the Ventas strategy has been very clear, which is that we want in the SHOP portfolio the absolute best assets and the best markets, highest barrier to entry, with institutional quality operators who can produce, have robust reporting functions, etc., and great management capabilities.

And we also believe in the mass market for senior housing and we believe in those assets as well, and we think that in general those assets should be in more of a triple-net lease structure. And that is how we have developed our strategy from the beginning and that is how we have been executing the strategy. And again, I think it has worked very well and maintains the balance that we spoke about. So I hope that answers your question, Dan.

It certainly answers it for your strategy, that is for sure.

Okay, good. Well, since we are the one making the investments, that is good.

Right, right, right. It is a matter of what you are willing to do.

Yes, exactly.

That is true. And again, not to beat a dead horse on the construction, but you've clearly picked up the amount of redevelopment in the Atria portfolio. You are going to fund some redevelopment of the Brookdale triple-net leased assets.

Is some of that in response to potential construction down the road where you want to get your properties fixed up before the competition gets in, take that market share and, again, provide yourself some insulation against any of that future construction if it does happen to filter into some of your MSAs. I am just trying to think about that a little bit more.

I think it is a combination of offense and defense, absolutely. These types of transactions generate low double-digit returns. They are the safest type of development type of investments you can do. You are leveraging your existing buildings. You know the team that is in place; you have good market experience there.

And you are also improving your portfolio, increasing the coverage at your assets, so there is a defensive strategy to it as well. So from our perspective, a measured approach to redevelopment which for a Company of our size, $150 million at any one point in time or a couple hundred million bucks is a very reasonable investment level where we can accomplish both offensive and defensive objectives.

Okay. Are you getting more requests from your triple-net operators for that kind of development -- redev funding?

Not only requests from them, but us sort of going through our portfolio and trying to identify those markets and assets and operators where there are opportunities for us to proactively approach them. So, yes.

Operator -- thank you, Dan. We have time for one or two more questions, Ian.

Karin Ford, KeyBanc Capital Markets.

I was wondering if you could please break down the cap rate between the three buckets within the $1.3 billion that you purchased this quarter.

Yes, I mean, we are providing it really as a blended cap rate, which is basically the first year 7.3% GAAP and 6.25% cash going in. And as we said, about 4% to 5% expected first couple year cash growth, Karin.

Okay, is it possible for you to give us a range -- since it is kind of a big number here, just a range of what the cap rates were within the buckets?

I mean probably 6.1% to 6.4%, something like that.

Okay, that is helpful, thank you. Second, can you just give us a little more color on what you think drove the underperformance in the Sunrise portfolio in Canada?

You know, I think there is a couple of properties there where there has been some turnover in the executive directors, and those properties have underperformed. Since it is a relatively small portfolio that has performed extremely well in the past, the underperformance there can be exaggerated.

So that is really it, but it is still we think a good market, and we are hopeful that Sunrise will be able to get those properties back to the levels they performed at historically.

Thanks. And last question from me. I think you are heading towards the higher end of your leverage range of 4 to 6 times debt to EBITDA. Can you just talk about your thoughts on equity as you think about your next slug of acquisitions here?

We are very consistent about saying we want to maintain a strong balance sheet, as you know. We are very comfortable with where we are now, and are generating probably well over $250 million a year in free cash flow to use for additional acquisitions and/or debt paydowns. So at 32% debt to enterprise value, I think we are in good shape and we are well within the range of our 5 times plus or minus a turn, Karin.

Okay, thanks.

Thank you so much. One more, operator, and then we will sign off.

Jeremy Metz, Deutsche Bank.

I will keep this really quick. Earlier, Ray, you talked about driving rates in the MOB portfolio. Can you just talk about what the mark-to-market or your growth was this quarter? And then just as you look out with over 16% of MOB rev expiring through 2014, just how early can you renew some of those and what is the mark-to-market outlook for that?

So, in general the mark-to-market on our MOB portfolio is a positive 2%. So that is sort of what we are looking at. As we look forward, I don't know that we are predicting anything different.

Okay. And then about -- just in terms of how early can you get in front of some of those renewals since that is a pretty big chunk of MOB rev?

I mean we are -- go ahead, Deb.

No.

We are in front of those things --

All the time.

-- all the time, well in advance of the renewals. I mean we are very actively managing our pipeline of lease expirations. And as you know, the great thing about medical office buildings is that physicians have their practices in those buildings; their customers are used to visiting them there. 96% of our buildings are on the campuses of the major health systems, so they are convenient for the physicians. So we have a very good product to market.

And a high retention rate.

And a very high retention rate.

Okay. Yes, no, I figured that. I just -- I think that is why I was a little surprised to see the actual percentage for 2014 actually go up. I was thinking it would start coming down as you start renewing a little bit of that, the closer we are getting to 2014.

Yes.

But appreciate the color.

Yes. And again, we don't necessarily move those into renewed until it is signed up and people are moving in.

Right.

So that might be some of the question -- that might be some of the answer to your question.

So anyway, I want to just wrap up the call and thank you for joining this morning. As always, we really appreciate your interest in Ventas and we're looking forward to seeing everyone in San Francisco next month. So take care and we will see you soon.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.