芬塔 (VTR) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Ventas Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Juan Sanabria. Sir, you may begin.

Thanks, Lauren. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2019.

As we start, let me express that all projections and predictions and certain other forward statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities law. The company cautions that these forward-looking statements are subject to many risks, uncertainties and contingencies. And stockholders and others should recognize that actual results may differ from the company's expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10-K for the year ended December 31, 2018 and the company's other SEC filings.

Please note that the quantitative reconciliation between each non-GAAP financial measure referenced on this conference call in its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com.

I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thanks, Juan, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas First Quarter 2019 Earnings Call. I'm happy to be joined on today's call by my outstanding Ventas colleagues.

We are delighted with our strong start to the year. During today's call, I'd like to describe some specific areas of excellence, performance and focus of the company, comment on market trends and just discuss our pivot to growth.

Let me begin with our excellent company-wide performance. I'm very pleased that we delivered $0.99 of normalized FFO for the quarter. Our property portfolio delivered solid same-store growth, our cash flow is strong and our balance sheet was even stronger from terrific capital markets activity. We are also today reaffirming our guidance issued in February. Our skilled and tenured team continues to be positive, cohesive and actively focused on delivering 2019 performance and driving our pivot to growth.

I was struck again this quarter by the resilience of our large diversified business that's expected to generate approximately $2 billion in net operating income during the year; that indisputable demographic demand for our businesses, which is in the very preliminary stages of asserting itself; the broad-based investment opportunities we have across our verticals; our best-in-class financial condition; our experience in proactive and effective asset management; our relationships with outstanding universities, partners and leading care providers; and the bright future ahead for Ventas.

It is easy to recognize these immense strengths while also acknowledging that we continue to feel the effects in our senior housing business of elevated openings of new communities as the industry works its way through the timing mismatch between delivery and demand.

Turning to some proof points for my optimism and confidence. Our office business, which should produce over $550 million in annual NOI, and is a focus of our investment activity, turned in an excellent quarter. It delivered 3.8% same-store cash growth, hit multiple milestones, received numerous prestigious recognitions and proved out its value and attractiveness. Let me illustrate with a few examples. First, our completed developments are exceeding. Our trophy downtown San Francisco MOB is open and 83% leased principally to AA-rated Sutter Health. And our new 3675 Market Street asset at U Penn campus is already 92% leased within months of its opening. 3675 recently attracted a publicly traded global biotechnology company, who wants to relocate, so it can collaborate with U Penn's genetic researchers.

Second, our in-progress, previously announced developments are hitting their stride as we broke ground on a $77 million development at Arizona State's biomedical campus in Phoenix. Point225, our Brown-related research and innovation project, is expected to open in the second half of 2019. And we signed a lease with Ascension to occupy 100% of our medical office building in Panama City, Florida, which we have begun to redevelop for them following last year's hurricane.

Third, we acquired a high-quality research and innovation asset in April for $128 million. This desirable fee simple lab building is near MIT and Harvard in the Cambridge market. We expect to see significant rent growth in this asset, which also offers us a window on the Cambridge life science custom market, one of the most desirable real estate markets in the U.S. We also effectuated the seamless re-tenanting of 250,000 square feet of research space to Yale University. Yale immediately replaced a corporate tenant in our world-class research building adjacent to Yale's campus for a 25-year term, so it could utilize the space for its STEM initiatives and collaborate with the Yale School of Medicine. Yale has now become our second largest R&I tenant.

Finally, we continue to make tangible progress on the balance of our $1.5 billion research and innovation development pipeline, and expect to reach significant additional milestones for a large portion of these identified projects through the balance of this year. We are also confident that substantially all of our $1.5 billion pipeline will be commenced within the next 15 months.

We're also making considerable advances in our triple-net lease business, which grew same-store cash results over 2% in the first quarter. Expected to generate over $750 million in NOI, this diversified business continues to grow, driven by annual lease escalators, improving performance by certain tenants and our continued investment in our properties, partially offset by modest anticipated lease modifications or asset transitions.

A few key accomplishments and things to note in the triple-net portfolio. We and Brookdale are successfully collaborating and implementing the agreements we reached in 2018. First, we've committed $36 million in capital for approved projects to enhance the quality and competitiveness of our Brookdale lease community at a 7% return. And second, we are jointly marketing and expect to sell over 20 assets in the portfolio for proceeds exceeding $120 million. We also executed a very attractive 5-year lease extension with Genesis Healthcare recently through 2026. The Genesis extension is on the same rental and escalation terms as the existing lease. It also retained the Genesis corporate guarantee, a sizable security deposit and a guarantee of the rent by a credit-worthy third party.

This favorable transaction demonstrates our proactive asset management approach and capabilities. We are applying this experience and capabilities to other portions of our triple-net portfolio. We are on track to complete a series of transactions in the portfolio that, in the aggregate, should offset our net -- triple-net leased NOI by approximately $10 million this year. Regarding our lease of 26 assets with Holiday Retirement, operations appear to be stabilizing and slightly improving. It expects this pro forma fixed charge coverage to be above 1.15x at year-end, inclusive of the guarantor. The management team appears to be energized and have a renewed focus on the company and operations.

Turning to our relationships with leading care providers. I'd like to highlight that Ardent had an outstanding fourth quarter in its continuing operations, and we are delighted with its performance. We're also encouraged that Medicare has proposed a nearly 4% effective rate increase for hospitals in fiscal year 2020, which commences later this year. This increase is very positive for the sector.

Kindred is also performing well, and its results trended positively through year-end, as its operational strategies have taken hold. In the long-term acute care space, Kindred continues to be a market leader, who is able to attract and care for medically complex compliant patients. The Medicare rate proposal for LTAC that was recently released includes a favorable 2.3% rate increase for our compliant patients. Atria continues to be a best-in-class senior care provider. It is nice to see that other developers and institutional owners agree as Atria is experiencing significantly increasing demand for its services and capabilities. Including Atria's development partnership with Related to operate high-end senior housing in major markets. Our 1/3 ownership in Atria enables us to benefit from Atria's success and maturation, which we embrace because it builds value and sustainability for the company. We hope to duplicate that success with middle-market operator, ESL, over time.

Moving to our investment activity. We continue to see quality investment opportunities in the market across our asset classes. I believe strongly in our ability to reignite external investment volume on top of a robust research and innovation development that will drive future growth at Ventas.

When we look at the investment environment, we segment opportunities roughly into 3 categories. First, low cap rate, private pay and high-quality assets like our trophy Battery Park senior living community in New York City, which is performing well, and our recently acquired research asset in Cambridge.

The second category consists of higher-yielding or opportunistic investments that arise episodically, where investments for Ventas has superior understanding of the assets or a unique relationship or market position. And third, classic medical assets and senior housing investments, where we can use our enhanced knowledge of the market, data, relationships and other competitive advantages to underwrite and integrate attractive portfolios. Executing on all 3 avenues over the years has produced significant accretion and value creation, and we intend to continue this approach.

Next, a word on senior housing trends. Through the first quarter, we are encouraged by the recently reported continued improvement in senior living starts. In the top 99 markets, starts were at their lowest level since the third quarter of 2012 and down 55% from the peak start level achieved in mid-2015. Even more notably, we are seeing early but unmistakable signs of demographic demand manifesting in the sector. A year-over-year growth in occupied units in the top 99 markets at 2.7% is the highest since Q3 2014 and close to its highest point ever. In the primary markets, annual absorption growth in the first quarter was 3%, the highest on record.

Construction as a percentage of inventory remains elevated, but is improving gradually. As a result of these positive trends and the forward growth rate in our customer demographic, the supply/demand equation will flip in our favor in the future after we work our way through absorption of the current excess supply, creating a powerful cyclical upside. The coming improvement in the senior housing cycle represents a key underpinning to our company's pivot to growth, the other pillars are organic portfolio growth in the rest of our business, the NOI expected from our research and innovation development pipeline and accretive external acquisitions. The whole team at Ventas brings its optimism, strength and skills to the table as we optimize the current environment and focus on capturing significant opportunities ahead.

In closing, the current economic expansion is on pace to be the longest ever shortly. As it inevitably winds down, Ventas is well positioned. With our growth prospects, resilient, diversified business model, need-based assets, solid dividend yield, outstanding balance sheet and demographic demand story, Ventas is a great place to invest.

With that, I'm happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. I'm happy to report a fast start to the year, with solid property-level growth from our high-quality portfolio of seniors housing, office and health care real estate. Our total property portfolio delivered same-store cash NOI growth of 1.1% in the first quarter, with office and triple-net leading the way and all of our segments performing in line with our expectations.

Let me detail our first quarter performance and 2019 guidance, starting with SHOP. Our SHOP business of cash same-store NOI decreased 2.2% versus prior year, within the range of full year expectations. Q1 same-store occupancy was solid at 86.6% as a result of share gains and expansion and demand. The first quarter occupancy gap versus prior year represented a modest 20 basis point decline and compares favorably to a year-over-year occupancy gap that averaged 80 basis points for the full year 2018. Meanwhile, Q1 REVPOR grew 30 basis points. January 2019 in-place rent and care increases to existing tenants were healthy, partially offset by re-leasing spreads, which continue to be affected by price competition. However, REVPOR in the balance of the year may benefit from lapping heightened discounting in the second half of 2018.

Operating expenses grew a modest 1.2%. Our leading operators did a terrific job adeptly managing staffing levels and driving efficiencies. Operating expenses, including management fees, were also favorable, given aligned incentives for growth with our operators.

At the market level, we continue to see NOI increases in our traditional strongholds, including Los Angeles and Canada. This strength was mitigated by lower NOI in markets affected by new competition, most notably Atlanta, Chicago and Detroit. We note that although this year's flu was more modest than last year, this season's activity has extended longer and later. We are monitoring the potential impact in the key second quarter selling season.

We're maintaining our full year same-store SHOP NOI guidance of flat to minus 3%. Big picture, though we are in the midst of elevated new openings, we are keeping our eyes on the horizon. Improving construction starts, accelerating demand and operating leverage underscore our conviction of the powerful upside in the senior housing recovery.

Moving on to our highly valuable office segment, which includes our university-based research and innovation and medical office businesses, and now represents 27% of our NOI. We note our office contribution to total NOI has expanded by 12 percentage points over the past 5 years. Our office segment delivered terrific same-store cash NOI growth of 3.8% in the first quarter.

The R&I business took the lead, increasing Q1 same-store cash NOI by an exciting 13%. Q1 benefited from a lease termination fee of $1.9 million from Alexion, whose space was backfilled in full by Yale, with a 25-year [lease](added by company after the call) term and enhanced credit terms and credit quality. Adjusted for this item, R&I increased 6%, driven by occupancy gains of 70 basis points on attractive lease-up at our Duke and Wake Forest assets, together with revenue per occupied square-foot increasing 5.1%. We affirm our full year guidance of 3% to 4% for R&I same-store NOI, we expect some same-store quarter-to-quarter lumpiness, driven by timing of lease-up activity.

Turning to our medical office business. MOB same-store NOI grew 1.1% in the first quarter. Growth was 1.5% for the quarter, right at the midpoint of our MOB guidance range after adjusting for a prior year Q1 lease modification benefit. Our team did an excellent job managing occupancy with tenant retention exceeding 87% in the first quarter. Pete Bulgarelli, now 1 year at the helm leading our office business, is making tangible moves to positively affect the MOB performance arc. Enhancing our leasing capabilities and processes, a sharp focus on customer satisfaction and early wins in redevelopment are a few examples. On a combined basis, we continue to expect our office portfolio of R&I and MOB assets to increase 2019 same-store cash NOI in the range of 1.5% to 2.5%.

On to our triple-net segment, where same-store cash NOI increased by 2.2% for the first quarter, driven by rent escalations. Trailing 12-month EBITDARM cash flow coverage, for our overall stabilized triple-net lease portfolio for the fourth quarter of 2018, the latest available information, remains stable with the prior quarter at 1.5x. Trailing 12-month coverage in our triple-net same-store seniors housing portfolio was 1.2x in the current reporting period. As rent coverage is a lagging measure, we expect to see future coverage round down to 1.1x with current industry conditions.

In our post-acute portfolio, trailing 12-month cash flow coverage was stable at 1.4x. Finally, Ardent delivered terrific results in 2018, driving rent coverage to expand to a robust 3x. We continue to estimate that our triple-net portfolio will grow 2019 same-store cash NOI in the range of 0.5% to 1.5%. Consistent with our previous guidance, rent escalators are expected to be partially offset by $10 million in NOI reductions from lease modifications with certain smaller senior housing operators.

Now turning to our overall company financial results and our 2019 guidance. Normalized FFO per share in the first quarter was $0.99, and was achieved together with an even stronger balance sheet. We again demonstrated capital markets excellence in the quarter. We issued $700 million in bonds with an average 16-year duration at an attractive at 4.1%, thereby extending our maturity profile and reducing our floating rate debt exposure.

Our new commercial paper program is off to a great start and is proving to be a very cost-effective way to finance our short-term working capital needs. And $100 million of equity issued under our ATM program efficiently funded our Cambridge life science acquisition. As a result of these actions, net debt to adjusted EBITDA improved 10 basis points sequentially to a robust 5.5x in Q1.

And our financial strength and flexibility is in top shape. Also of note in the quarter was the adoption of the new accounting leasing standard. Its effects include establishing and operating lease asset and liability exceeding $200 million, recasting revenues and expenses with no effect on NOI and $0.02 per share in incremental leasing costs for the full year reflected in SG&A expenses and incorporated in our guidance.

That's a good segue to our 2019 guidance for the company. We are pleased to reaffirm both our property cash NOI same-store guidance as well as our expected 2019 normalized FFO per share of $3.75 to $3.85. We expect to receive at the midpoint of the year $500 million in asset dispositions and receipt of loan repayments used to fund $500 million of redevelopments and developments principally focused behind the R&I pipeline. This capital recycling is diluted in 2019, but delivers attractive future growth and value creation.

At our guidance midpoint, implied FFO per share over the balance of the year is $0.94 per quarter on average. The expected $0.05 difference versus our $0.99 in the first quarter is simply described by $0.01 of nonrecurring fees in Q1, $0.02 of high-yielding dispositions used to fund R&I development, and the balance is typical SHOP seasonality. This is consistent with previous guidance.

Finally, as is customary, guidance does not include unidentified acquisitions and also assumes approximately 362 million weighted average fully diluted shares.

To close, the Ventas team is very pleased with our start to the year, and is committed to execute with excellence against our strategic initiatives in 2019. We also hope to see you all at our Investor Day on June 17 and 18 in Philadelphia, where we will bring to the life of quality of our assets, our operators and partners and our Ventas team.

With that, I'll hand it to the operator to open the line for questions.

(Operator Instructions) And our first question comes from Nick Joseph with Citi.

Debbie, you discussed the 3 buckets of deals. What's the right long-term balance between low cap rate opportunistic and more traditional MOB senior housing assets?

Well, I do think you stated properly, which is there's a balance. And that balance, in any given market, may change. I think that, basically, between your first and third buckets, which is the low cap rate and then the attractive portfolios of MOB and senior housing, that would be anywhere from, call it, 60% to 75%. And then the opportunistic would be, call it, 25% of it.

If you look at the current acquisition pipeline, how does it break down between those 3 buckets? And where are the best risk-adjusted returns today?

Again, it varies in different markets. Right now, our #1 capital allocation priority is really the research and innovation pipeline, and that's clearly at the top of the list. And then I would say our pipeline breaks down along -- generally along the lines I described.

And our next question comes from Nick Yulico with Scotiabank.

I was hoping to hear a little bit more about the Cambridge deal. This is more traditional lab space than you've previously owned. Is this a change in strategy, where you're looking to focus more on traditional lab space within your R&I segment?

It would be a good opportunity for a quality asset in a great market with potential rent growth at a size where it can give us a nice window on that market. We do view it as adjacent or related to our existing university strategy, given the type of tenants who are collaborating with MIT and Harvard.

Okay. And then in terms of, I guess, larger portfolio deals you might be looking at, how does that opportunity set look today? And you talked a lot about senior housing, at some point, flipping in your favor in the future and some. I guess, I'm wondering, does that mean that now the attention will focus even more on trying to get senior housing acquisition opportunities?

Our pipeline is typically across all the asset classes. And obviously, we do see the upside in senior housing and certainly would invest in that sector. Our priorities are as described.

Okay, and then just lastly, Bob, I want to go back to the triple-net lease coverage in senior housing. I think you said that, you gave a preview on that, you expect it to move from 1.2 to 1.1 since it's been a bit of a lagging metric that we see. And I guess, what I'm wondering then is, you do have the $10 million of lease modifications in guidance. But then when we look at the portfolio and we look at the bucket that has coverage of below 1.1, it's about 13% of the company's NOI. And so I guess, I'm just wondering, how much of the lease modifications in guidance address that pool of assets, where the coverage is lower? And then at what point -- you talked about Holiday. It sounds like things are improving there, but I mean, should we not be assuming that there's a lease modification needed at Holiday at some point?

Well, there is a lot in there. I would just say, again, because the lease coverage is a lagging indicator, we expect a rounding down at some point as the cycle bottoms. And the primary driver of it is really Brookdale. And the $10 million obviously would improve it, but it's really -- that's a rounding error in the whole calculation. It's so small.

And our next question comes from Vikram Malhotra with Morgan Stanley.

I want to just get a sense of sort of how you're viewing the RIDEA trajectory from here. I noticed sort of on a same-store basis, occupancy was probably at a low point where we've seen recent trends. But the expense growth was low as well. Can you kind of talk about how you see the expense trajectory trending through the year? And how much of that may be a lower occupancy function?

Sure, I'll take that one. So you're right. We had a great quarter in terms of OpEx growth, a little over 1%. Our guidance for the year, you'll recall, was 2% to 3%. So particularly good in the first quarter. A few drivers in the quarter continue to [be flexing] (corrected by company after the call) the volume of labor in light of occupancy. So that lever continues. Indirect costs managed very, very well. The second bucket, I would have is, for example, utilities, where new procurement contracts have been signed up, are benefiting that line. And then just alignment with our operators in terms of profit growth. Those are the 3 buckets I'd highlight. 2% to 3% still feels like the right number for the year, underlying wage pressure trends haven't changed, for example, but it certainly was a good quarter.

Okay, great. And then just a bigger picture. I mean, you've talked a lot about the research and innovation, the MOB, the office segment as a whole. There have been several portfolios that have recently created probably a few more in the marketplace. Just sort of wondering, how do you look at those portfolios vetted to some of the development opportunities which you've outlined very nicely? Kind of what caused you to maybe stay away? Or was it just pricing got away from you?

This is John Cobb. And I think you should assume that we look at all those deals. We evaluate every single one, both from the medical office side and the senior housing side. And we're exploring both the R&I development, but also looking at acquisition, as you saw this quarter.

Okay, great. And then just last one, if I can clarify the transaction. Expenses went up. Is that all Cambridge-related for the year?

It went down.

Oh, for the outlook is, I think, your point. And there's some transition costs embedded in that, that have gone up in terms of addressing some of these triple-net smaller operators. So that's in the outlook for the year.

Our next question comes from John Kim with BMO Capital Markets.

On the investment buckets, the opportunistic high-yielding buckets, is that possible to give some characteristics of what this may entail, whether it's public versus private, which property type or what geography they may be in?

Matt, there's a little bit of feedback on the line. Could you identify yourself again and ask the question again?

Sure. It's John Kim from BMO. I wanted to know, on the investment buckets, if you could provide some characteristics of what the opportunistic high-yielding investments may be, whether it's public or private, what property type they may be or what geography?

Good morning, John. Good to hear from you. I mean, opportunistic, by definition, are things that pop up that has a variety of characteristics that are not what I would call regular way activities. They can be across-the-board public or private. For example, public is when your multiple may have a huge advantage over someone else. Typically, they're more often private opportunities, where we may get a call on something, where we have a relationship, or we may have particular knowledge about assets that enables us to move quickly. I would say even our acquisition of our research and innovation portfolio itself, I would call opportunistic in the sense that it was an attractive asset we have worked on multiple times. And at some point, John Gray called and said, "Can you do this in 30 days?" And we said, "Absolutely." And we were off to the races. So that's one good example. Another one was when we helped Ardent buy a very attractive portfolio and enabled them to double in size with the loan that we made to them. That was well structured and higher yielding and was repaid on time and early actually. And so those are good examples, I would say, of this opportunistic category. I hope that gives you some color and texture on what I mean by that.

Sure. What about geography as far as domestic versus international or core versus non-core markets?

Well, international has not typically been in what I would classify as that category. I mean, something could be. But typically, as you know, these international opportunities in health care are at very low cap rates, particularly when tax-affected. And so I'd be less likely to put it in that category, but of course, there could be something from time to time that's in that category.

Okay. On the triple-net coverage and the $10 million impact on these modifications, which was unchanged during the quarter, is there a likelihood that this increases just given the coverage of coming down? And also, can you remind us if that's already reflected in your same-store results?

So I'll cover the second question, which is there -- the $10 million is just really the balance of the year, John, is the way to think about it. And we're comfortable that, that covers the small regional operators we talked about, both last time and this time, for the full $10 million.

I guess, one last one for me. Is there an update on the Ardent IPO?

That's a subject that we've agreed between us that Ardent will address on behalf of both of us.

(Operator Instructions) Our next question comes from Michael Carroll with RBC Capital Markets.

Debbie, I wanted to touch on your comments that you had in prepared remarks saying that you're seeing early signs on the demographic trends kind of starting to impact the senior living space. Can you highlight what you're actually seeing? Is that just looking at the population trends? Or are you actually seeing some stuff on the property levels that's encouraging you?

Well, I think the absorption for demand is really the key green shoot, I would call it, that we're seeing at record levels in the top 31 markets. And again, we're seeing the supply [lower] (corrected by company after the call) -- less than half of what it was at the peak. These do not, as we know, translate into financial results in the current periods, but will, over time, translate into this powerful cyclical upside.

Okay. And then just real quick, Bob, I just wanted to touch on the $10 million lease amendments. I know we -- there's been several questions already about it, but I just wanted to confirm, have you done any of those adjustments in 1Q? I guess, when's the timing of that $10 million adjustment? Is that in the full $10 million? Is that just the 2019 impact? Or is that the run rate going forward?

That's a 2019 impact, Mike, the $10 million really is the balance of the year. So take that as not reflected in the first quarter, but reflected in the balance of the year. We have line of sight to basically execute on those by the mid-year. So we should see those impacts coming through.

The next question comes from Joshua Dennerlein with Bank of America.

The term fee in office, the $1.9 million, if you back that out that off the office same-store pool, what would have been same-store growth there? And then, I guess, same for the Genesis cash payment and what that would've done to the net lease.

Sure. So let me start just reconfirming those are both great deals. Whether it be Genesis or the Alexion and the Yale transactions, as Debbie highlighted, really strong credits, really great transactions, which we're really proud of in cash in the bank at the same time. So to answer the question specifically, office impact is 150 basis points to the same-store in the quarter. Triple-net is 90 basis point impact for the quarter. Net-net-net, when all's said and done for the full year, it's, call it,10 basis point impact on the same-store.

Okay. All right. And then I saw that you guys -- it looks like you added a new line item on the income statement under property level operating expenses called triple-net lease. Can you -- I guess, before the triple-net lease rental income, it looks like it was a net number. Is this something new going forward? Or what was sort of the change?

Yes. So I mentioned that we adopted the leasing standard in the quarter, has a number of effects. One of it's we grossed up effectively in triple-net, where we're reimbursing both revenues and expenses. No NOI impact, things like taxes. So that's the geography change you're seeing in the P&L.

The next question comes from Daniel Bernstein with Capital One.

I just want to go back to the lease expenses on seniors housing, the drop in that. Is it -- how much of that is ESL kind of maybe realigning expenses from former assets? Or is that more broad in RIDEA across each of your Sunrise operators as well?

Yes. I think you're referring to the operating expenses, if I'm right, Dan. Is that correct?

Yes.

So yes, again, you're right to say favorable, a modest slightly over 1% growth rate in OpEx. We think 2% to 3% for the year. So some things that happened in the quarter, as I mentioned, we continue to have some runway on flexing labor volume and, at the same time, have done a great job managing indirect costs. So that's what's really driving the quarter. But again, with wage inflation, we expect to see more like 2% to 3% for the year.

Okay. So it's broad and not just ESL?

It's -- yes, it's [broad-based] (corrected by company after the call), somatic, yes.

Okay. And the other question I had is on the MOB assets within office. The NOI growth, there's about 1%, and industry's probably doing 2% or 3%. You alluded to some initiatives that you've taken in there to maybe improve that. So I just want to rehash that. And where are those initiatives, and kind of what do you think the upside is within that MOB part of your portfolio?

Sure. This is Pete Bulgarelli. Great question. I'm glad you asked it. I was hoping for this question. That's what I was hoping for.

I'm glad to ask it.

Yes, thanks. One clarification we should make is that if we weren't lapping an event in the first quarter of '18, it would've been 1.5% growth. So it'd be right at the midpoint between our guidance. But having said that, look, we think that happy tenants are awfully important. They increase our renewal rates, which we're very proud of, at 87%. And they also are great for word-of-mouth in leasing. So in the last year, we've been able to cut our response times, just as an example, to work orders by 50% between first quarter of '18 to first quarter of '19, which is really enhancing our tenant satisfaction. We've also put a large focus on improving common areas as well as just infrastructure within the building, so the buildings look a bit better. And we're very proud to say we just hired a new head of leasing. She comes from Colliers, led their health care practice across the country, and she starts May 1. So we're very excited to have all 3 of those coming together to drive better results.

Okay. So it just sounds like maybe once you get past some of that lapping of last year, maybe you're back to like 1.5%, kind of 2% NOI growth for the second half of this,

Yes. And we're describing it like that.

Our next question comes from Rich Anderson with SMBC Nikko.

So when I was listening to your comments, Debbie, at the beginning, you said the focus of your investment activity is in the office sector. And my first thought was that it was surprising to hear that. Not that you haven't said it in the past, but you guys usually zig when others are zagging. But then I've kind of thought about it more, and I was thinking, maybe perhaps higher-yielding opportunistic, which just requires more work to get done, and it takes longer to cross the finish line. Is that kind of what you're thinking that when you think about that more opportunistic high-yielding bucket that you just have to deal a lot more careful about approaching them, and, hence, the probability of completion is lower than the other 2?

So I would say that the office is a focus of investment activity because it is performing so well, and we have such great advantages and momentum that we're trying to take advantage of, especially in the R&I development pipeline. So I think I want to clarify that. In terms of the opportunistic, those can be more complex and take longer. But they can also be, as I said, things have popped up that we can get done really quickly because of our understanding of the market or the asset. So that can go either way. But the important part, again, is to have a big pipeline, have a diverse pipeline, have good relationships and good understanding of the markets, so we can act across the board.

Okay. And then just a follow-up perhaps on the hospital side, I realized that you'll let Ardent speak for you on their IPO, but I'm just curious if you are seeing things pop up a little bit more on the acute care hospital segment of the world with the split Congress and some consideration given to the fact that maybe we're going to be with ACA for a period of time despite what the president says.

We continue to be -- to like that the category of health systems and hospitals that we've invested in with great management teams, great market share, is an area where we would certainly be willing to commit capital. And Ardent has proven to be an excellent, incredible investment for us, and we would do more. We will continue to be selective in that market. I do believe that we will have the benefits of the Affordable Care Act for a while. I mentioned the 4% effective increase -- almost 4% that is being proposed for later in the year. And I also believe that we may see additional Medicaid expansion in certain states, which would also be favorable. So those are some good trends I would point to, and we would continue to invest behind that if we had appropriate opportunities to do so.

Our next question comes from Tayo Okusanya with Jefferies.

First question. The commentary just around the opportunistic bucket of kind of transactions or investments you could do. I mean, I get that. And again, you guys have been pretty good about doing that. I think of the past, I used to kind of call it the rabbit out of the hat that you would pull. But the thing about that is, while I think it's great near term, if it's not sustained on a longer-term basis, you may have these kind of occasional dips in earnings growth. So how do you kind of manage those kind of 2 things?

Well, thank you. I think, again, we've done a good job over time in allocating capital to the 3 different categories that I described. The opportunistic one is something that could be -- it could be a higher-yielding asset, as -- which can be lumpier, as you pointed out, or it could be something like the life science and research and innovation acquisition that I mentioned that really has created a whole new business line for us and has been sustainable and actually has driven and will continue to drive a significant amount of growth. So that category of assets is broader than simply a high-yielding category.

That's helpful. And then could you also talk about the Genesis transaction? Again, it just seems like a pretty unique structure here. You see some of your peers either trying to get rid of their Genesis exposure. You guys have actually extended it. You got a cash payment. You got a corporate guarantee. You got a guarantee over rent by a third party. Again, I'm just kind of curious. What's the -- when you put that with Genesis to kind of come up with these kind of creative-type solution, I'm just -- and again, it's impressive to me that you can kind of do this while you have a lot of other people who are kind of doing the exact opposite thing. And kike what are you seeing in here that you think others may not be seeing?

Well, thank you for saying that. It is a good example of our proactive asset management capabilities and our ability to really optimize situations on behalf of our shareholders. And I agree, while Genesis is a small tenant, about $20 million a year, the fact that we extended the lease with a corporate guarantee out to 2026 is impressive and is a real win for the company, including the cash payment, the guarantees and all the other things that we talked about. And this is the kind of management expertise and the benefits of our excellent team that we bring to bear to try to create good outcomes for our shareholders across the board. And we've done it time and time again over the years.

But who is this third party that's kind of being given a guarantee on their behalf? I'm just like really surprised to hear that.

Well, if you think about the corporate history of Genesis, you might be able to figure it out. But I'm just going to leave it where it stands now with a creditworthy third-party guarantor.

The next question comes from Todd Stender with Wells Fargo.

Taking a look at your -- the new Cambridge acquisition. When you look at the low cap rate and high cost per square foot, it suggests you're looking for some pretty good upside in rents, and you noted that with the double-digit rent increases for the last couple of years. Can you provide more details on the current tenant base, maybe occupancy and maybe what the lease roll looks like?

Sure. This is John Cobb. The 1030 Mass deal that we announced was -- well, we think is a highly attractive asset in Cambridge. It is a high price per foot, but you have really great current rental rates, which is in the low-70s. You're seeing market rent above that. The current -- it is 100% occupied with a really good diverse tenant mix that are all lab and life science.

And substantially, all the tenant base are really, as I mentioned, people who either work at or collaborate with MIT and Harvard, and it's an above 5% cap rate with room to grow. So -- and it's a fee simple interest, which is very significant in terms of valuation.

The next question comes from Lukas Hartwich with Green Street.

It looks like Brookdale EBITDA coverage moved down a tier. I'm just curious how that will look after the planned asset sales.

Yes, I mentioned that, and that's -- we did a great deal with Brookdale last year. We're implementing that deal, committing capital to the assets and also disposing of a pool of assets that we identified together. That coverage will not change materially because, as you recall, Ventas keeps the net proceeds and then Brookdale gets a rent credit equal to 6.25% on the net proceeds that we receive. So it will be -- it won't move materially.

That's helpful. And then you kind of talked about it earlier, but I was just hoping you could provide a little more color on the strong performance in the SHOP portfolio from Canada.

Sure. We love talking about Canada. Grew occupancy rates, and the bottom line. We have a great position and wonderful assets in that market. You see the demand growth, what the powerful upside of senior housing can look and feel like. And it added another great quarter, so it's really been a shining star for us over the last couple of years.

The next question comes from Karin Ford with MUFG Securities.

On the last call, you guys talked about an upward drift in cap rates. Is that what you've seen? And if so, how much and in what segments?

Sure. And this is Debbie. Just commenting on that, I would say that, when we talked last quarter, we said we may be starting to see a slight upward tick in cap rates. And I think in some transactions, you still may be seeing that, although the quality may not be like-for-like. Right after I said that, of course, as interest rate expectations have been moving up, I thought that, that was related to some of the potential cap rate expansion that we were seeing. And that, of course -- those expectations have then changed fairly significantly in terms of people's forward expectations and the actual rates. And so the impact of that really probably would put a lid on any hope for cap rate expansion that we might have seen at that time on a like-for-like basis.

Understood. My other question is, can you give us any insight into SHOP occupancy and rate growth in April? It sounded like you were a bit more cautious, given the comments you made on the flu. Just was wondering if I was hearing that correctly.

Right, Karin. So the flu is really unusual this year in so far as it was clearly more mild in the first quarter relative to last year. But what's unusual is how it's extended into the second quarter. And indeed, Atria has had a few recent buildings closed for flu in terms of quarantine, which is unusual. So that's why we're just sort of flagging it because the key selling season is Q2. It's an unusual item. I'd cycle back to the occupancy year-on-year. That down 20 basis points continues to be trending well relative to prior year, which is both share gain, I think, and some of that demand look that we've been talking about.

And did occupancy continue to do well in April?

It's still early days. It trends seasonally. It tends to be quite flat at this time of year.

Our next question comes from Jordan Sadler with KeyBanc.

Just following up on the SHOP discussion a little bit. So I think, Bob, if I recall correctly, you thought, throughout the year, performance would generally be pretty consistent. Is that generally still your expectation based on what you're seeing in SHOP? And if I could sort of also ask, what are you seeing -- you've given us sort of previously sort of the re-leasing spreads of sort of The Street rates. I'd be curious what those are.

Yes, good questions. Let me start with pricing in REVPOR and the re-leasing spread. Our guidance for the year, you'll recall, was re-leasing spreads to be down high single digits. And indeed, that's what we saw in the first quarter. At the same time, the in-place increases, for us, is in place, was again healthy. And so the blended average of those 2 things is what you see in the 30 basis points for the quarter. Now looking at the prior year, we really saw a discounting in the back half of the year start to take root and some more aggressive pricing in the back half of the year. So as I think about REVPOR over the course of the year, I think there's some stabilization in the back half of the year that could be potential, given prior year comps. To the first question, generally speaking, our range, as you know, for the full year, is flat to down 3%. We were down, call it, 2% in the quarter. So in that range. And it will be relatively, generally speaking, consistent, I would say. Wild swings are unlikely. There's going to be choppiness. There's always choppiness. I don't want to kind of overstate the nature of it.

Okay. I think you laid it out well. The other question I had was regarding -- I think, Debbie, you said, you seemed confident about starting the rest of the $1.5 billion pipeline over the course of the next 15 months. Did I catch that correctly? So I just want to make sure.

Yes, I am confident because my partner, John Cobb, is confident.

Okay. So you basically have like $1.4 billion of additional commencements to announce?

Yes. So just -- yes, right. I mean, so we believe we'll have significant milestones to announce on a number of the projects this year, and that we're confident that we'll commence substantially all the $1.5 billion research and innovation pipeline within the next 15 months.

Okay. I think that's a bit faster than I think we saw last quarter when we spoke to you, although maybe it didn't lean us to believe.

Good.

So the last one was just Alexion. That -- what was that termination fee? And where is it sitting on the P&L?

Sure. It was $1.9 million in the quarter, sitting in the office R&I same-store in the quarter.

And what's interesting about it, though, too, is that the replacement tenant in Yale moved in to the tune of 250,000 square feet with zero down time. So better credit, 25-year lease term, and the fee was kind of the additional benefit, the tail really, because the dog is the Yale extension with us.

Our next question is from Michael Mueller with JPMorgan.

I just have 2 quick questions. So for the $1.5 billion starts over the next 15 months, can you give us a rough idea of what the delivery window will span from?

Well, once commenced, the rule of thumb is really 18 to 24 months of -- until opening. And the projects will be commenced, obviously, on a project-by-project basis over those next 15 months.

Got it, okay. And then, Bob, just to confirm, so going back to the $10 million lease modification, you said the impact will be 2019. I think you mentioned midyear or so. Should we assume that's a $20 million annualized impact going forward?

Yes. So to clarify, the $10 million this year impact Qs 2 through 4. We expect to have effectively activated the changes by midyear. And that obviously helps drive that impact over the course of the year. But it's $10 million over the course of 3 quarters.

Over 3 quarters? Okay. So less than $20 million? Got it.

The next question comes from Chad Vanacore with Stifel.

So just looking at SHOP occupancy down same-store 20 basis points year-over-year, 120 basis points sequentially. How much of that would you estimate as normal seasonal weakness from flu and weather? And how much of that is from excess supply pressures?

Well, seasonally, you're right to say that there's typically a decline in Q4 to Q1. So we tend to look year-over-year as our best measure. And the 20 basis point GAAP, when you go back, as you know, and look back last year, starting out in the first half, we had, call it, 150 basis point GAAP versus prior year. That narrowed by the end of the year, and it stayed pretty consistent tight to prior year at 20 basis points down. So the occupancy line, we're feeling pretty good about. And again, I think it's reflecting that organic share.

All right. So in light of that, how should we expect SHOP occupancy to trend from this point to the end of the year, especially considering comments that you're seeing some pickup in demand?

We're staying with our guidance really through the P&L, which sort of occupancy was flat to down 50 basis points for the year on average. So I think that's still a good number.

All right. Just one quick one. So you're marketing 20 assets with Brookdale. How much of the total of $30 million of rents that you agreed to does that represent? So I guess, there's more to come?

We expect there to be a total of about $15 million ultimately. And maybe -- that may be it -- that may be all that we decide to do with them.

Yes. I'm sorry, Deb, was that $15 million in rents or $15 million more assets?

In total. In total, not just the ones that we're marketing now. $15 million of rents.

.Okay. $15 million in total rents? Okay. All right.

Yes, yes, exactly. Okay, we have time for a couple more, and then we'll wrap up.

The next question comes from Derek Johnston with Deutsche Bank.

Just a little more on SHOP revenues. And I was hoping you could help reconcile the strong January rent increases from in-place residence, as mentioned in the release, with really the first time we've seen REVPOR drop below 1% on a year-over-year growth basis, and really the first time your year-over-year same-store SHOP revenue growth has been negative at least as far back as we've been tracking since 2010.

Sure. I mean, a very quick and simple answer is the re-leasing spread discussed earlier. Again, the in-place is very strong. But what you asked to look at is last year, over the course of the year, what happened? The price competition was suppressing price over the course of the year. And therefore, Q1 versus Q1 year-over-year, that is driving the impact. Now in the balance of the year, particularly in the second half, we'll be lapping that discounting. So that should firm up. But really, it's a year-over-year comp issue, driven by the re-leasing spread.

Got it. Understood. And then just kind of looking forward, what do you think we see an inflection point in senior housing and really a return to growth within that portfolio? Is it like a mid- to late-2020 event as supply wanes and comps get a little easier? Or how should I kind of think about this going forward?

Derek, you will be the first to know. It's a very good, very important, very complex question, and we look forward to giving you more visibility on it.

And our last question comes from Jonathan Hughes with Raymond James.

On the Cambridge acquisition, I know it's 100% leased, but I don't think I heard the lease maturity. When would you be able to reset those rents?

Yes. Another great question. Because we're looking at upside here, we talked about the cyclical upside in senior housing, and now we'll talk about the asset. The weighted average lease term right now is about 5 years. One of the things we really like, though, about this market and the characteristic of this building is that the tenants are successful. They expand. Maybe there's not enough room for them in this particular building. And so they may buy out of their lease early, and then you have a chance mark-to-market and you may have the opportunity to get a lease termination fee. So that's how we would expect this to play out.

Okay, that's great. And then just one more. It looks like Eclipse's annualized NOI was down 15% year-over-year despite one more property versus a year ago. I'm just curious, how should that portfolio trend throughout the year? And maybe what kind of happened versus a year ago?

Yes. Jonathan, I think when you look at the annualized NOI, Q1 versus Q4, you get some of the technical factors, namely days, that play a role in there. Fewer days when you build by the day as a revenue and NOI impact. And so that annualized is much of what you're seeing.

It's being exaggerated.

Yes. Stepping back, we believe ESL is going to be accretive to our growth this year, and they continue to implement the plans they identified early on.

Great. But even on year-over-year, it was down 15%. So that should negate the seasonality impact, right?

Well, and very -- there's a lot of noise. As you know, we transitioned this time last year, first quarter last year. So there was a lot of noise in the ESL, P&L. I would encourage you to look over a long period when you think about year-over-year. And again, on that basis, I think they'll be accretive to our growth.

Okay, we appreciate that, and we absolutely appreciate everyone's attention this morning and interest in the company. The whole Ventas team is really excited about delivering an excellent quarter, and we look forward to seeing you in Philadelphia in June. So thank you again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.