芬塔 (VTR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Ventas earnings conference call. My name is Tahitia and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Lori Wittman, Senior Vice President, Capital Markets and Investor Relations. Please proceed.

Thank you. Good morning and welcome to the Ventas conference call to review the Company's announcement yesterday regarding its results for the quarter ended June 30, 2014.

As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the Federal Securities Laws. These projections, predictions, and statements are based on Management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties, and contingencies; and stockholders and others should recognize that actual events 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, 2013 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 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 it's most directly comparable GAAP measure, as well as the Company's supplemental disclosure schedule, are available in the Investor Relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the Company.

Thanks, Lori. Good morning. I'd like to echo Lori's welcome to all of our shareholders and other participants and thank you for joining our call this morning. I'm pleased to share our record results for the quarter, introduce our increased guidance for the year, and discuss our pending transactions. Following my remarks, Ray Lewis will discuss our portfolio and Rick Schweinhart will review our financial results in detail. As always, we will then be pleased to answer your questions.

Our second-quarter financial results showcased the strength of our platform and our ability to continue to grow earnings, cash flow, and our dividend, delivering superior results for our shareholders. First, let me address some of the highlights of the quarter. Normalized FFO grew 11% to $1.12 per share, compared to the second quarter of last year. Our growth resulted from increases in same-store NOI, accretion from acquisitions, and receipt of fees and other income. Excluding non-cash items, normalized FFO also grew by 11%.

We continued our long-standing focus on delivering reliable growing cash flow. Cash flow from operations grew 12% this quarter compared to the same period last year, to $311 million and it's up over 17%, year-to-date. This extraordinary growth is due to our strong performance in raising capital effectively, investing capital wisely, and managing our assets productively. Specifically, our same-store cash flow growth was 4.5% this quarter and our weighted average cost of debt improved to 3.7%. In short, Ventas's financial performance continues to be consistent and outstanding.

Turning to our investments, I'd like to highlight the benefits of our two pending acquisitions, totaling $3.8 billion. One is our acquisition of Holiday Retirement's 29 independent living communities. The second is our pending stock and cash acquisition of American Realty Capital Healthcare Trust, or HCT. These transactions solidified Ventas's position as the global leader in senior living and medical office buildings. I'd like to take some time to review our rationale for these transactions, and discuss some of the positive characteristics of the assets and the capital structure for the deals. With these transactions, we are acquiring high-quality assets that are consistent with our strategy. The NOI from these assets is 87% private pay.

Together, the transactions should provide at least $0.10 accretion to normalized funds from operations and funds available for distribution in 2015, assuming that we issue $1.8 billion of equity at the $67.13 per share valuation currently contemplated under the HCT merger agreement. As a result, these transactions will help us continue to grow cash flows and our dividend. The expected unlevered going-in cap rate on these transactions exceeds 6%, which is consistent with market pricing for high-quality, private-pay healthcare and senior living assets.

In total, Holiday and HCT represent $3.8 billion of investments that will be funded with nearly 50% equity and the balance in cash or debt assumption. We have a BBB+ credit rating from all three rating agencies and we believe our funding of these deals shows our commitment to retaining an excellent credit profile and rating. Continuing our balance and diversified approach to capital allocation, the combined acquisitions generate 40% of their NOI from triple-net leased properties, 46% from senior housing operating communities, and 14% from multi-tenant medical office buildings, or MOBs. In terms of stability of cash flows, the triple-net leased portfolio has an average remaining lease term of 12 years, and extremely limited near-term rollover. Importantly, we are also continuing to build an international business at Ventas, with 5% of our pro-forma NOI derived from assets outside the US.

Breaking the HCT and Holiday portfolios down to more granular pieces, here are some other important data points. The HCT portfolio, which is valued at $2.9 billion, including its pipeline, is composed of high-quality, newer assets that derive the vast majority of their NOI from private pay sources. The 4 million square feet of MOBs we are acquiring from HCT fit our overall MOB strategy, and my partner, Todd Lillibridge, is eager to bring those assets into his MOB fold.

Here's why. They are 97% occupied, have average remaining lease terms of 8.3 years, and one-half the buildings were newly constructed in the last 10 years. Each of these metrics improves the overall quality of our existing market-leading MOB be portfolio. The MOBs are also consistent with our strategy because they are 90% affiliated, or on campus, with strong hospital sponsorship. Credit quality is also strong, with over 70% of the NOI associated with investment-grade credits.

In particular, the MOBs are affiliated with leading regional health systems, some of whom are already our clients and others we are excited to do business with. They include Advocate, Baylor, Memorial Hermann, and UC Davis. The HCT MOBs average over 50,000 square feet per building and are principally comprehensive or specialty outpatient centers that serve as essential hubs for the affiliated health systems care network. They are strategically located to provide the convenience and access necessary for successful population health management. Currently, most of HCT's multi-tenant MOBs are managed by third parties and we see some potential upside to future property management insourcing because of our Lillibridge capabilities and scale.

The HCT portfolio of 29 managed senior living assets are operated by eight respected regional care providers. This portfolio is also high-quality, with occupancy approximating 94% and NOI per unit per year of $16,700. It generates REVPOR per month of $4,300. These shop statistics compare favorably with NIC data and other wholly private-pay portfolios without skilled nursing beds. We also like the local market demographics of the HCT senior living assets. They are in markets with above-average concentrations of seniors and high expected growth in that cohort. We expect the NOI in these assets to grow at 4% to 5%.

Turning to the Holiday assets, these apartment-like 29 independent living communities are also located in markets with exceedingly high percentages of seniors and they have robust median household incomes. Current occupancy in the portfolio exceeds 90% and the properties have margins of about 50% and REVPOR of CAD3,200 per month. The NOI growth rate is also expected to approximate 4% to 5%. We are excited to grow with Atria north of the border and they will take over the management of these Holiday communities at closing. In terms of funding and timing, we expect to complete the Holiday acquisition shortly. Funded with proceeds of a Canadian dollar-denominated bank facility, we closed on July 31 and the assumption of mortgage debt. As soon as practicable, expect to issue Canadian bonds to provide a long-term capital structure for the acquisition.

We continue to expect to close the HCT acquisition in accordance with its terms probably late in the fourth quarter. As previously stated, the HCT transaction will be principally funded with $1.8 billion to $2 billion in Ventas equity, valued at $67.13 a share, plus cash and assumed debt. This balanced deal structure is classic Ventas. It protects Ventas shareholders and the accretion; eliminates equity market risk, fees, and discounts; is balance sheet-friendly; and allows HCT shareholders to participate in Ventas's future success. In sum, we are excited about our pending investments as we continue to build a high-quality, reliable, diversified portfolio of productive healthcare and senior housing assets.

Looking ahead, we are pleased to increase our full-year 2014 normalized FFO guidance to $4.39 to $4.43 per share as a result of our expected closing on Holiday and our results year-to-date. This guidance, if achieved, would deliver 7% to 8% per-share normalized FFO growth over 2013, excluding non-cash items. It would also represent the ninth year out of the last 11 when Ventas delivered over 7% per share growth. During that period, we have also grown our dividend at a compound annual rate exceeding 9% and yet, our payout ratio remains an exceptional 67% of normalized FFO per share, excluding non-cash items. We are confident we can extend our long track record of excellent, consistent performance to produce reliable growing cash flow, dividends, earnings, and total return for our shareholders.

With that, I'm delighted to turn the floor over to Ventas President, Ray Lewis.

Thank you, Debbie. Same-store cash NOI and our diversified portfolio of seniors housing, medical office, and post-acute properties grew by 4.5% in the second quarter and delivered strong growth across the board. Let me start with our seniors housing operating portfolio, operated by Atria and Sunrise. This high-quality private-pay portfolio now stands at 239 total properties and produced $125 million of NOI in the quarter, an increase of 13.5% versus the prior year. Results were driven by strong performance in the 198 properties in our same-store stable US portfolio, which was up 6.6% year-over-year, and the impact of acquisitions, partially offset by declining performance in our 12 Sunrise Canadian communities.

Occupancy in the total portfolio averaged 90.3% in the quarter compared to senior housing occupancy in the 31 primary markets as reported by NIC of 89.9% and our REVPOR was 60% higher. NOI for the 218 properties in our total same-store portfolio increased 4.8% year-over-year in local currency, driven by a 2.7% increase in REVPOR. As a point of comparison, NIC annual rent growth for all seniors housing in the 31 primary markets was 1.8% year-over-year. NOI growth in our 210 same-store stabilized properties was a solid 5.2% year-over-year in local currency. Rates were up 2.6% and margins improved 90 basis points.

During the quarter, we transitioned the management of two US senior housing communities to Atria from Sunrise, pursuant to the terms of our Sunrise agreements. As we have told you in the past, we have been increasing the pace of our redevelopment activity over the past few quarters. We had nine properties under redevelopment in the second quarter of 2014, versus two properties in 2013. More importantly, we had approximately 140 more units offline during the second quarter, versus the same period of last year. We now have $116 million of projects under construction at 8% to 12% unlevered yields. These investments represent an excellent risk-adjusted return and we expect them to enhance our growth rate as they come online.

Construction as a percentage of inventory reported by NIC declined for the third straight quarter and stood at 3.2% across all seniors housing types in the 31 primary markets. Our SHOP portfolio continues to be better than NIC trends, with construction as a percentage of inventory at 2.6% in the three-mile trade area around our buildings. NIC continues to project that absorption will be positive through the next four quarters. With our expected acquisition of 29 seniors housing properties from Holiday, we are pleased to provide updated SHOP NOI guidance of $512 million to $520 million.

Next, I'll cover our triple-net lease portfolio, which is diversified across 906 seniors housing, skilled nursing, and hospital assets, and accounts for 54% of our NOI. Same-store cash NOI for the 841 properties that we owned in the second quarter of 2014 and 2013 was up 4.9% year-over-year. Growth was driven by contractual escalations and active portfolio management, including renewals, negotiated rent increases, and fees. Cash flow coverage in the 735 properties in our same-store triple-net lease portfolio for the first quarter of 2014, the latest available information, was strong and stable at 1.6 times.

Looking forward, we recently received good news from CMS that SNF and LTACH Medicare reimbursements are set to increase 2% and 1.1%, respectively, in the next fiscal year. We are also ramping up redevelopment in our triple-net lease portfolio. We now have about $60 million of triple-net redevelopment projects under construction at an average yield over 8% and have another $40 million that we have approved. Another important feature of these attractive investments is that our lease payments increase as we fund construction, so we can drive growth and improve portfolio quality at the same time.

Before I move on to MOBs, I'll provide a brief update on the re-leasing of the 108 properties leased to Kindred that expire on September 30 of this year. We have now leased, transitioned, or sold 103 buildings, and the remaining 5 facilities are on track to be transitioned or sold by year-end. Upon completion, we expect that we will have fully replaced the expiring rent for 2015 and further diversified our income stream with good, regional operators. I'd like to congratulate our asset management and legal teams for another outstanding re-leasing outcome. With the re-leasing of the Kindred portfolio, our weighted average lease maturity is now 8.6 years and rent from triple-net leases expiring before 2018 is less than 3% of our current annualized NOI. So the triple-net portfolio continues to deliver reliable and growing cash flows.

Finally, I'd like to briefly discuss Ventas's portfolio of 275 consolidated medical office properties, spanning over 15 million square feet and accounting for 15% of our annualized NOI. Here are a few of the MOB segment highlights for the second quarter. For the total portfolio, NOI was $72.3 million and occupancy was a very healthy 91.7%. Most importantly, cash NOI in the 263 same-store consolidated medical office buildings increased 3.8% year-over-year, driven primarily by a 3.2% increase in rate and 100 basis point increase in margin. Sequentially, total same-store occupancy increased by 10 basis points over the first quarter to 91.7%. Same-store stable occupancy was a strong 93%, consistent with the first quarter. Leasing activity remains strong and our retention rate in the second quarter was 80%. We continued to lease space, push rates, manage expenses, and drive bottom-line growth in our MOB portfolio.

Since we acquired Lillibridge in 2010, we have more than tripled our MOB portfolio and scaled our market-leading Lillibridge operating platform. As part of our ongoing portfolio management and capital recycling activities, we are currently bringing a portfolio of non-strategic MOBs to market. We expect to generate around $200 million in proceeds from the sale. During the second quarter, our balance and diversified portfolio delivered strong performance across the board and we are tracking toward the high end of our original same-store cash NOI growth range of between 3% and 4% in 2014.

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

Thank you, Ray. Cash flows from operations during the second quarter of 2014 were $311 million, up 12% from the second quarter of 2013. During the quarter, we raised $700 million through the issuance of senior notes, with a weighted average interest rate of 2.75% and a weighted average maturity of seven years. The proceeds funded almost $200 million, representing the cash portion of investments in the quarter, CapEx, development and redevelopment, and $188 million of mortgage prepayments, with the balance used to reduce the revolver. The mortgage debt prepaid was at a weighted average cash interest rate of 5.9% and a GAAP rate of 4.1%.

Normalized FFO was $1.12 per diluted share for the second quarter of 2014, an increase of 11% compared to the second quarter of 2013 per share results of $1.01. Normalized FFO increased 11% to $332 million compared to $298 million for the second quarter of 2013. Normalized FFO increased due to improvement in all three segments, the impact of accretive investments completed in 2014 and 2013, and fees and other income totaling less than $0.02 per share. This strong performance was partially offset by the dilutive impact of asset sales and loan repayments we received in 2013 and 2014, and an increase in G&A.

Our fully diluted share count increased less than 1% in the second quarter of 2014, to 296.5 million shares compared to the same period in 2013. Our average cash interest rate improved 40 basis points to 3.7% at June 30, 2014 compared to June 30, 2013. We have been able to maintain our weighted average debt maturity at nearly seven years. At quarter end, our credit statistics remained outstanding, with a net debt-to-pro-forma EBITDA at 5.5 times, our fixed charge coverage ratio in excess of 4 times, and secured debt-to-enterprise value of 8%. At quarter-end, our revolver balance was $179 million and our debt-to-enterprise value was an outstanding 34%.

The Company timely filed its second-quarter 2014 10-Q yesterday, with the Securities and Exchange Commission. The 10-Q and our second-quarter and year-to-date 2014 results, as well as the comparable 2013 periods have been reviewed by our new, independent auditors, KPMG. KPMG continues to re-audit the Company's 2012 and 2013 financial statements. We expect KPMG's work to be successfully completed by September 30. We are increasing our 2014 normalized FFO per diluted share guidance range to between $4.39 and $4.43, an increase from our previously announced 2014 guidance range of $4.31 to $4.37 per diluted share.

Our guidance, if achieved, represents 7% to 8% per share growth, excluding non-cash items estimated at $0.12 per share. Our new guidance range includes the net accretive impact of our Holiday investment that we expect to complete shortly, but excludes any impact from the HCT acquisition. Our guidance does not include the impact of additional unannounced capital transactions or acquisitions or dispositions. In summary, we had an excellent quarter and we are well-positioned to deliver positive results for the balance of the year. Debbie?

Thanks, Rick. I did want to take a minute before we open the floor to questions, just to comment on our outstanding roster of very successful tenants and operators. In particular, I wanted to congratulate Andy Smith and his team at Brookdale on their recent completion of the Emeritus merger. We wish Brookdale, who is now our largest tenant, every continued success. We would also like to congratulate our new UK hospital tenant, Spire, on its highly successful IPO. Spire now has over $1 billion equity market capitalization and its business is thriving, with a balanced payor mix and strong cash flow.

Operator, please open the floor to questions.

(Operator Instructions)

Juan Sanabria, Bank of America.

For the US RIDEA portfolio, when do you expect the impacts that have held back the same-store growth to wear off? Should we be expecting any reacceleration into 2015?

Juan, this is Ray. As I mentioned in the script, we've got about 140 more units offline at this time this year than we had last year. Those units will be coming back online over the next several quarters and should help our growth rate, but we will also be continuing to execute on our redevelopment program. The thing to watch for is the change in redevelopment over time, as we ramp up or scale back the redevelopment, pursuant to opportunities that we're seeing in the market.

Okay. What's the underlying issue behind the weakness in the same-store assets in Canada? Are we close to those assets troughing? How should we think about growth going forward there?

We've got 12 properties in Canada that are operated by Sunrise and account for about 5% of our seniors housing operating NOI. The decline in performance was driven entirely by the Sunrise management at the communities. These properties used to be top performers in our portfolio and we think that they can be top performers again, but there's been significant turnover at Sunrise in Canada, in both the regional and property-level staff.

That's just impacted the performance of these properties across the board. There's new staff in place. We'll be looking for that improvement -- those properties to improve going forward. That's what our expectations are.

Okay, great. I noticed you include the incremental dispositions for the back half of the year. Could you give us any color on what assets you are looking to dispose of and the yield expectations there? Anything on timing?

Yes, we are looking at a portfolio of non-strategic MOBs. Because the market is so strong, we thought it would be a good time to put together a portfolio of those and bring it to market. We would expect fairly sporty pricing on those in the 6%-ish plus or minus range.

Okay, great. Just the last one for me, on the dividend, Debbie, you noted the 67% payout. Do you think that the Company or the Board would look to maybe readdress the payout ratio in the second half of the year? Or, is that likely something to be reassessed in 2015?

The Board obviously makes a dividend decision every quarter. Ventas's history has really been a fantastic one in this regard, which is to have above-average dividend growth, a very favorable payout ratio that makes the dividend both secure and have room for future improvement. We would love to be able to continue that pattern because we think it's a very important part of the overall total return proposition we offer to shareholders.

Okay. Thank you very much.

Michael Bilerman, Citi.

Ray, maybe we can just go back to Canada for a moment just because the confidence, obviously, you are attributing it predominantly to Sunrise. Do you not think that there's anything going on in Canada overall, in terms of being able to have confidence to do the large acquisition of Holiday? What diligence did you go through?

Because when you look at the Sunrise stats for the 12 assets that you have, this has not been a one-quarter thing. You go back to the fourth-quarter of 2012, occupancy was over 93% and each quarter it's gone down. I'm just trying to think about the remedies that you have, or at what point you can start pushing your manager or be a little bit more asset-management intensive versus it just being Canadian problem?

Michael, this is Debbie. I'll take at least one part of that question and the most important part. In looking at the Holiday assets that we are acquiring, we've done extensive diligence. These assets have had a good history of NOI growth and are performing very well during the same time period that we've seen the deterioration in the 12 Sunrise assets. We do think that the Sunrise performance is company/manager-specific and we do think that those assets are good assets in good markets that can return to optimal performance in the future. That's what we are focused on.

The currency has obviously played a part?

Yes, that is true. That is true. That's the other thing. About one-third of that performance differential is based on FX changes, because we do report in US dollars at whatever the then current exchange rate is, and that does result in some fluctuations on the NOI line. That impact is somewhat mitigated by Canadian dollar borrowings that we have, but that's below the NOI line. We are very consistent about reflecting FX impacts as the exchange rate changes and that's an important transparency that we bring to our reporting.

More broadly, in terms of just working with operators, at what point where -- arguably, they are operating the assets -- at what point in this process in Canada were you getting frustrated, again, because it's been about a 1.5 years already of consistent occupancy declines and flattish RevPOR. I'm just curious how should we think about your asset management, not only for Canada, but just in general, in terms of, when you see weakness, how do you react and what you do?

First of all, we have very good relationships with our operators. We work with them to try to collaboratively solve problems as they arise in our portfolio from time to time. We also have excellent management contracts that have protective rights, as you know. When these rights are triggered, we evaluate whether we think another operator could do a better job with the assets and what the risk of transitioning those assets is.

So, in the case of Canada, we look at it and say they've got new leadership in place. It will likely take some while to understand whether or not that leadership is going to be effective in turning around the assets and we will be watching it very closely over the next several quarters.

Okay. Just last question, just general about international. Debbie, you talked about, in your opening remarks, growing international business. You called it 5%, I believe, pro-forma, post-Holiday and the acquisitions. How do you think about where you want to take that percentage? What do think the right breakdown is, if you thought about building diversity across product type, is there a certain diversity you want globally, in terms of ex-US?

We don't have a target international percentage that we are looking toward at the moment. We are trying to get comfortable in making investments in markets where we believe there are outstanding policy, demographic, or other reasons where we think we can get an appropriate risk-adjusted return. We found that, in certain cases, certainly with the Spire acquisition in the UK, as our beachhead investment, and then again, with the Holiday investment that we are doing now.

Over time, I would expect, assuming that we are successful, as we make these incremental investments, I would assume that we would grow in the UK and Canada in specific asset types. I do think it is an important extension of our growth and diversification strategy that we've executed very successfully over the last 10 to 15 years.

Great. Thank you.

Josh Raskin, Barclays.

Here with Jack, as well. First question, just on the RIDEA portfolio, overall, previously, you guys had talked about a 4% to 6% same-store growth. I didn't see that in the release, so just curious if you guys were confirming that. Then with the inclusion of Holiday expected, as you mentioned, shortly, what would be the contribution from Holiday within that portfolio?

The same-store growth assumption that's embedded in our updated guidance is about 4% to 5%. We've said that we would expect -- or that Holiday would close before September 1. There's probably four months of Holiday contribution in that guidance number.

Okay. What's Holiday on a same-store? What's their NOI growth looking like?

We've talked about our expectations being in the 4% to 5% range.

Okay. So also in the 4% to 5%.

Got it. This is Jack here, too. I just wanted to touch on construction one more time and if there was anything specific in any of your markets you could point out. Then maybe just a little bit more specifically, if we look at markets six through 10, it looks like there's a little bit more exposure there. Just really trying to parse out when it shows up and then if it's showing up on the occupancy side or some sort of pressure on rate?

We are not seeing any significant amount of pressure from new construction in our portfolio. As we said, our portfolio, in general, has better construction as a percentage of inventory statistics than NIC. Even in markets where there is more construction, our properties are generally outperforming the NIC averages in those markets. It speaks to the quality of our portfolio in terms of the assets, the operators, and the locations.

Okay. Just one housekeeping thing. With Kindred, the expectation, the five that are remaining, if it does go past October 1, is it full rent or is it one-half rent beyond that?

It's full rent through the end of the year and there is a period of time should anything stretch over that could be at one-half rent. It's a very collaborative arrangement that we reached with Kindred.

Okay. Got it. Thanks, guys.

Nick Yulico, UBS.

On the triple-net portfolio, can you explain what items cause the same-store NOI growth to be 4.9%, which is pretty high? You mentioned some fees, rent increases?

Fees, rent and renegotiations are a normal part of our business. We are proactive asset managers and we are always looking for opportunities to drive value in our portfolio. As you mentioned, our same-store portfolio grew 4.9% in the quarter. More typically, growth is around 3%, so clearly we had a good quarter, driven by our ability to generate some fee income during the quarter.

Was any of this related to the Kindred portfolio?

No.

No.

Okay. Then going back to -- you mentioned fees and other income equaling less than $0.02 in the quarter. $0.01 of that was a loan repayment. What was the -- so the other fees were in this triple-net segment?

From time to time, we have operators that come to us and need certain consents or changes to the documents and those create opportunities for us to improve our position in the lease or generate fees. It's that type of activity.

But again, the lion's share of it is really fundamental, which is improvement in rents, escalations, upward roll-ups in rent on maturities, things like that. That's the vast majority of it.

Okay. Then going back to the dispositions, you mentioned this is a $200 million MOB portfolio sale. You said you expect around a 6% cap rate on that? Is that right?

In the 6%-ish range. Obviously, the market will be the market. But we feel good about the bids that we are seeing on MOBs and so we think this will be very attractive.

How should we think about that portfolio relative to the rest of your MOB portfolio? Is this lower occupancy, is it older quality? What is this--?

It's non-strategic to the portfolio. Again, we are taking the opportunity that we want to be more proactive, in terms of recycling capital and taking advantage of market conditions when we can and using that capital to redeploy into our business strategy.

But, it really is mixed by age, by geography, by size, and relationships with the hospital systems, probably more than anything, which are not strategic.

Okay. My question was whether this is at all -- you mentioned strong pricing, that this is, to some regards, a lower quality MOB portfolio. The rest of your MOB portfolio, pricing would be sub-6% cap rate or something. If that's part of the--?

It would. It absolutely would be sub-6%. There's no question about that. So, but we think these, again, will command a very strong bid out in the marketplace, because they're good assets, they're just not strategic to our Lillibridge business.

Okay. Just one last question is on the senior housing segment. You report the same-store, you report stabilized. Can you remind us that -- when you are doing these redev communities, is it an entire community or are you doing a portion of the units? How does that difference affect whether the assets are in a stabilized versus the overall same-store?

Great question because they are all a little bit different. I'll ask Ray to describe what we do.

Projects can range from $1 million to $20 million-plus, and depending upon the scale of the project, there may be more or less units offline in a particular building. Sometimes, it's just as simple as upgrading the common areas and sometimes we are going through and redoing entire wings of the building or taking units offline to add a Life Guidance.

It really is going to depend upon what the opportunity in that building and that market is. With respect to when we move it into redevelopment, it's really when the significant redevelopment is underway and the project is getting ready to come back online, it will be in a lease-up mode.

There is some judgment involved, but generally, if it's a major project and there is going to be some disruption of one kind or another, and that is underway, we would put it in redevelopment. But, it's not little ticky-tacky things. It's major projects when they are underway.

All right. Thanks everyone.

Richard Anderson, Mizuho Securities.

Why did the -- what was the factor for the same-store NOI growth target for the SHOP portfolio coming down, call it at 0.5% relative to last quarter?

You've got Canada in there.

Sure. Okay. So is it mainly a Canada thing?

Yes.

Okay. Then speaking of Canada, you mentioned this is all a company-specific event and hopefully getting fixed. Do you have an estimate, if it is -- that's the case, do you have an estimate of how far below market rents are right now in those 12 assets?

I don't think it's as much a rent issue as it is occupancy and managing expenses. The rents are actually reasonably good in that market. It's really more increasing the occupancy, as Michael noted previously, and managing expenses, in particular, which have increased over the last couple of quarters. That points to the management more than anything. The rates might point to the quality of the markets.

Okay. Do you think that there's anything about the new version of Sunrise management-only business owned by one of your peers, HCN, partially? Do you think that there's anything about that new model of theirs that is impacting their management style?

It's obvious that there's been significant, multiple changes in the executive-level management and ownership at the company. That inevitably has an impact on a focus between selling the company and changing owners and changing leadership, so it's really needing a renewed focus in these 12 assets.

Hopefully, Sunrise executive leadership now is in place and stable and they are going to bring these assets back to their historical performance, which again was quite good. These used to be 94%, 95% occupied and were the top performers in the portfolio. There's no reason that the assets can't achieve that level again and it just is going to take some focus from executive management and we are working with them to bring that focus.

Okay. When you bought Sunrise REIT in 2007, there were 63 other assets in the US. Is there any impact there? Or are those churning along just fine?

If you look at the performance of our US portfolio, and there are 81 other Sunrise assets in our US portfolio. It's performed very well across the board. I would say Sunrise is holding up their end there.

Okay. Then last question, big picture. You are growing the medical office portfolio by about 30% with HCT, assuming that closes. Have you given any thought about -- it came up -- I talked a little bit about spin co thought. You mentioned below 5% or below 6% cap rate for the rest of your MOB portfolio. Do think that some day you might consider something along those lines to break it up and see what the MOB portfolio is worth on a dump?

We definitely will always look at opportunities to create value for our shareholders, whatever those opportunities may be and whatever the market is indicating we should be doing to create value. I do think we have assembled an unbelievable enterprise and company that has some characteristics of reliable cash flow growth and diversified asset class, diversified tenant base, et cetera.

Given that we are one-third healthcare, one-third real estate, one-third finance, there is a tremendous benefit to scale and diversification. We would think long and hard before we would break up what we think is a very, very well-performing, very high-quality enterprise. That said, again, we are all about creating value for shareholders and we will hopefully always make decisions that accomplish that.

Great. Thank you very much.

Karin Ford, KeyBanc Capital Markets.

First question, just on the investment pipeline. Can you just characterize any changes in that from a volume, in both bigger size deals and smaller deals and asset classes? Have you guys had to pass on any deals recently, as a result of the re-audit?

Good question. No, the pipeline is good. Again, our assets type, we have a huge domestic market. We continue to see good deal flow, both here and abroad. We want to be -- we have $3.8 billion under contract and pending, so we are excited about that.

As we move forward, we will continue to be prudent. But I would expect us to continue to be able to grow accretively and strategically. We just want to make sure we're continuing to show good discipline and continue to build value for shareholders in what we acquire.

Great. Thanks for that. Just another question on the guidance. The 3.5% to 4% same-store NOI growth for the total portfolio, what was that in the previous guidance and does the new normalized guidance include the cost of the re-audit?

The 3.5% to 4%, it just really means that we believe we are going to end up in the high range of our original 3% to 4% same-store total company cash flow growth, which is very outstanding, I would add, and stacks up well across the REIT space. In terms of the re-audits, we did say that, that would be excluded from normalized FFO, because clearly it's an unusual event that it's not really core to our cash flow and earnings production.

Thanks. Then, just last question. Can you give us an update on the search for the new CFO?

The search is continuing on. I'm very happy to have my colleague Mr. Schweinhart here to ensure that the re-audits are expeditiously and successfully completed and to ensure that we have a smooth transition. We are continuing the search and would expect to provide an update as soon as we have one.

Thanks very much.

Tayo Okusanya, Jefferies.

Quick question on the acquisition front. When you guys did the HCT deal, there was a lot of talk around HCT being a front-runner for the Griffin-America portfolio. That ultimately went to NorthStar. I'm just curious the dynamics around that and why -- whether you were interested in that portfolio at all or whether it just didn't make sense for you? And what were the dynamics around that large portfolio in the market, but it going to a competitor of yours?

We really like the assets that we are acquiring for all the reasons stated, which I won't repeat. I would tell you, that the Griffin-NorthStar deal is one that really validates the pricing that we have talked about and what pricing there is out there in the marketplace. It also validates the idea that there continue to be plenty of high-quality assets in our space that are available to fuel continued external growth.

But it sounds like they were assets you also liked. Pricing seemed like what you expected on that portfolio. It would seem like it's something you could have competed very effectively for, though. Was there any interest on your end or the deal just didn't make sense from your end given some of your other strategic objectives?

Again, we are focused on all the reasons that we acquired the portfolios that we are acquiring and we really like those. Again, we congratulate NorthStar on their acquisition and, again, believe that we are in a terrific market to continue to grow.

Okay. That's fine.

(Laughter.)

That's fine, Debbie. I get it. The HCT transaction, it sounds like you feel very confident about it closing in fourth-quarter, but just again curious why you decided not to include in guidance? Is it just because you are not sure about the timing when it could occur in fourth-quarter?

Well, Holiday is imminent and we have already funded the debt for that, so it seemed appropriate, since we have better visibility into Holiday to include that in guidance at this point. The timing on HCT is more variable. Also, really, even if it does close at the end of the fourth-quarter, let's call it, that would have very limited impact on 2014, anyway. This just seemed the best way to provide the best guidance to our investors.

Okay. Great. Then just one more for me. Appreciate the patience. The SHOP portfolio, could you just talk a little bit about initial trends you are seeing in the third-quarter around July data in particular?

Yes. Good question. I'm going to not steal Ray's thunder, so let him answer that.

Thanks, Tayo. As you know, the occupancy trends tend to decline in the first-quarter and into the second-quarter and then pick up again as we emerge into the third-quarter. We are seeing those trends continue this year in our portfolio. It's also important to note that there are a number of expenses that are back end loaded in the portfolio, typically.

It's a little early to say whether or not those are going to materialize. But we always have repairs and maintenance, and paint and paper, some vacation expenses and other things that are loaded towards the back end of the year. Right now, it seems like traditional historical seasonal patterns are holding.

Right, but occupancy is trending upward.

Occupancy is trending up, yes.

Okay. That's helpful. Thank you.

Vincent Chao, Deutsche Bank.

Just a couple of clean-up questions here. Just sticking with the same-store NOI guidance increase tracking toward the high-end of the range. It does seem to apply some deceleration from the 2Q level, and to some degree, the 1H level. We've already talked about the triple-net portfolio maybe indexing a little higher than it normally would.

I'm just curious, on the fee side of things -- is that something you typically wouldn't project going forward? Is that where some of that deceleration is coming from? Really trying to get some understanding of what the visibility is on those fees?

Good. Those kinds of upticks, of all types, whether they're rent renegotiations or so on, are difficult to predict, so we don't typically model them, so the quarters can be variable. But, I do think we are very excited that we think our overall business is going to generate in the top end of that original 3% to 4% same-store cash growth.

We're glad that all segments are contributing to that. We just think -- we don't think of it -- we don't think of this as accelerating, we think of it as somewhat unpredictable and lumpy. We view the full year as the true test of what our business is delivering.

Okay. That's fair. Is there anything, though, that's causing the uplift here in the last couple of quarters, that you can point to?

We've just had good quarters. Hopefully, we will continue to have good quarters. That's what we try to do. That's the management value-add that we try to bring to the business.

That's fair. Just maybe switching over to the SHOP side of things. I know that the overall range was [brought in] a little bit, sounds like Canada is the culprit, here, but looking at the OpEx growth, it does look like it was pretty limited this quarter. You mentioned some expenses increasing in the back half.

But just curious, on a year-over-year basis, would you expect those OpEx trends to go back up to the maybe more inflationary level, 2%-ish range? And to hit the guidance, does that suggest that you do think that the revenue side will also tick up commensurately?

Revenue will probably tick up as occupancy increases. Rates are generally projected to be flat to slightly down in the second half. Operating expenses will increase in the second half, as I described. It's our expectation. So yes, they probably would trend more towards that inflationary level.

Okay. Then just last one for me. On the dispositions, I think I heard you say that they are being marketed. Are they in the market today, or are they just getting ready to be put on the market? And what do think, timing-wise, when we should see those close?

Any day now, they'll be in the market. The timing would be late in the year, presumably, for execution.

Okay. Thank you.

Michael Knott, Green Street Advisors.

Debbie, a question for you just in terms of how you think about cost of capital when you are thinking about the couple of large transactions that you guys have pending right now. When the circumstance is such that your implied cap rate on your stock is roughly similar to the initial yield on the transactions you are entering into, just curious how you think about that from a capital allocations standpoint? Obviously, you guys are generating some earnings accretion. Just curious about how you think about all those.

We're very focused on our long-term cost of capital and the fact that we do need to finance things on a long-term basis with a significant equity component and we believe that our job is to continue to grow cash flows with limited risk and a strong balance sheet. So we've been able to do that over an extended period of time.

We do believe, also, that, frankly, our cost of equity is not reflecting the value of our assets in some ways in the marketplace and you are seeing that in pricing. So I do think that this transaction, or both transactions, that we are entering into are good for our cash flow, our growth rate, the quality of our portfolio, and I feel very good about how we are financing them in a very thoughtful and balanced way.

Okay. Thanks for that. Then a question for you on CapEx, maybe this is for Ray as well, but I'm just curious how do you think about this. On the SHOP portfolio, it looks like you are spending about 15% of NOI on CapEx, but yet this quarter, that NOI stream grew slower than the triple-net business line. Just curious how you think about those NOI growths on an after-CapEx basis.

Michael, I would say that within any one particular quarter, because the nature of CapEx spending is going to be lumpy, you are going to see that relationship move up and down, if you look at it over time. We think that the better growth rates that you get from the SHOP assets compensate for the additional CapEx that you invest in the buildings over time relative to a triple-net lease portfolio. We believe that holds true.

When we underwrite these assets, we obviously do it on a before- and after-CapEx basis and we look at growth rates and then we look at variability in the cash flows, or how you would assess those. The key point that is important to make is that those assets are the highest-quality assets, essentially, in our portfolio. They, again, would command a very sporty cap rate that would likely be under 6%, even before CapEx.

You can't really compare a yield on a triple-net lease asset and a SHOP asset unless they are identical assets. You have to be careful about how you think about that, but we do always look at growth and returns on a before- and after-CapEx basis.

Okay. Thanks for that. Just a couple more quick ones for me. Just to clarify, on the acquired, or to be acquired senior living assets, you mentioned 4% to 5% NOI growth. What time frame are you talking about that expectation? Is that just, say, 2014 or 2015 or is that intermediate term, beyond that?

I would call it the immediate to intermediate term. So, one to three years, call it.

Okay. Thanks. Then last one for me. We haven't talked about skilled nursing on this call at all. Just curious if you have any view on how that's performing. It seems like the environment is pretty benign, which seems pretty good.

Then, just curious, there's also word, at least from the Omega call a couple of weeks ago, about a possible $1 billion deal out there. I'm just curious if that's a segment of your portfolio that you would look to grow at all at attractive pricing.

I'm glad you asked about that. We, as part of our balanced and diversified approach, we have always thought that skilled nursing is an asset type that is an important part of the healthcare delivery system for seniors and that well-done, well-underwritten, well-operated, with coverage, it can be a very good asset class to own. Our portfolio of government-reimbursed assets has about a 65% quality mix, so we have a very, very high-quality post-acute portfolio.

Again, what we are seeing is that there is stability in that marketplace, and that yields for a high-quality portfolio like we have, are a lot lower, i.e., values are a lot higher than people are typically ascribing to that portfolio. So, we like our post-acute business. We think it's very high-quality. Under the right circumstances, we would consider investing in the asset class, but obviously only with a top operator, with good coverage, and a yield that we thought was appropriate for the long-term risk and cyclicality of the asset type and reimbursement.

Okay. Thank you.

Operator, with that, we are going to close the call. I want to, once again, thank everyone for their time and attention. I'm sure everyone is thrilled that earnings season is coming to a close. We appreciate the time you spent with us this morning. We look forward to seeing you first thing in September. Thank you very much.

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.