Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Ventas Earnings Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Juan Sabnabria, Vice President of Investor Relations.
Thank you. Please go ahead.
Thanks, Norma. Good morning, and welcome to the Ventas conference call to review the company's announcements today regarding its results for the quarter ended September 30, 2019. 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 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 materially 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 factors that may affect the company's operations and results is included in the company's annual report on Form 10 ks for the year ended December 31, 2018, and the company's other SEC filings. Please note the quantitative reconciliations between each non GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website atwww.ventasreit.com. I will now turn the call over to Deborah A. Cafaro, Chairman and CEO of the company.
Thank you, Juan, and good morning to all of our shareholders and other participants. Welcome to the Q3 2019 earnings call. I'm joined on today's call by my valued Ventas colleagues as we discuss our strong enterprise results in the quarter and other recent highlights, including the closing of our La Group Marise partnership, accelerating investment into our future growth, primarily in our Research and Innovation business and our environmental, social and governance leadership that is highlighted in our 2019 corporate sustainability report released today. I'll also address the lower than expected 3rd quarter performance of our senior housing operating portfolio and its forward implications for us in the context of very positive leading indicators in the business. It is very heartening to see that construction starts of new senior living communities this quarter, especially in assisted living, were the lowest they've been in 9 years and that demand for senior living is growing at its highest level on record.
Starting with our Q3 results, I'm very pleased to report a strong quarter of normalized FFO, dollars 0.96 per share. Our performance was driven by accretive investments, excellent capital markets activity and growth in our office and triple net lease business. We've also refined our full year normalized FFO per share guidance range to $3.81 to $3.85 per share, maintaining our midpoint at $3.83 per share. This expected outcome for 2019 is also consistent with the upper half of the normalized FFO guidance range we initiated in the Q1 of this year. Ventas is benefiting significantly from our diversified portfolio and our effective investment in capital markets activity.
Indeed in the quarter, the 70% of our same store portfolio represented by our office, triple net lease and Canadian senior housing portfolios grew cash NOI by nearly 3%. However, in our U. S. Shop business, which represents 25% of our enterprise, we experienced dynamic operating conditions in the quarter and occupancy took a precipitous leg down at the end of September. Thus, as Bob will address in more detail, we expect our 2019 SHOP performance to fall below our original guidance range, mostly because our portfolio did not experience the strong seasonal lift in occupancy that is typical and rate softness continued during the quarter.
These trends are continuing into the Q4 leading to a reduction in our full year SHOP 2019 guidance. Because we will end 2019 and enter 2020 off a lower base, we've also concluded that our enterprise growth will be deferred until after 2020. While we are very disappointed in this deferral of our growth expectations, the team is resolute and focused on closing out the year by delivering the solid 2019 enterprise results we've outlined today. Additionally, we intend to make necessary adjustments and decisions that will improve performance and position us to capture the powerful upside that remains ahead in senior housing. At the same time, we will continue to invest in our future, be good partners, stay productive and focus on delivering value for our shareholders from the strong diversified business we have built.
We expect to provide you with 2020 guidance and the components thereof in the Q1 consistent with our historic practice. Among other things, our guidance in senior housing will be predicated on our review of operator budgets, how the year ends and the impact of January 1 rate increases. Before Bob addresses senior housing in greater detail, I'd like to highlight our accretive and attractive investment activities and our ESG achievements. Within the $3,800,000,000 of consolidated investments we've made year to date, we were delighted to close on our new partnership with Montreal based Le Group Marie in the Q3 with its price portfolio of 29 new high quality apartment like senior housing communities and 5 in progress development valued at US1.8 billion dollars The LGM transaction and integration have gone exceedingly well and performance is in line with our expectations. To our new partners north of the border, we thank you for choosing Ventas as your partner and we congratulate you on your success in maintaining your company and well regarded brand and positioning LGM for continued sustainable growth.
We've also made great progress on our $1,500,000,000 university based research and innovation development pipeline as we continue to build this exciting business with our best in class development partner Wexford. Among our key accomplishments in the quarter execution of a 30 year lease with Drexel University for its new School of Nursing and Health Professions with an expected yield of nearly 10% and the expansion of our footprint in the burgeoning U. S. City market where our assets are currently 98% occupied. The acquired assets increase our developable square footage in the U City submarket of Philadelphia to 4,000,000 square feet, net of our 1U city and Drexel development.
The Ventas team is also aiming to close and commence several more R and I projects in the pipeline over the next several quarters. In sum, we are pleased with our year to quality and volume as we continue to improve our portfolio and invest in our future. Finally, we've significantly elevated our environmental, social and governance profile. Our long standing ESG efforts are organized around 3 key pillars of people, planet and performance, and we are pleased that our ESG leadership has been repeatedly recognized by several prestigious organizations. Today, we released our 2019 corporate sustainability report that catalogs our ESG achievements and aspirations.
We will continue our focused improvements in ESG areas that also support our business success. In closing, over the past 2 decades, Ventas has experienced incredible business success and outperformance, punctuated by periodic setbacks. Yet with integrity, positivity, skill, focus and teamwork, we've always been able to rally back stronger than ever and today is no exception. With that, I'm pleased to turn the call over to our CFO, Bob Propst.
Thanks, Debbie. I'm going to start by diving straight into our Q3 results for our SHOP segment, which represents 33% of our NOI. SHOP same store cash NOI in Q3 decreased 5% versus prior year, a disappointing result that fell short of our expectations. This result was led by revenue weakness from the cumulative effect of new openings in a dynamic competitive market. I'd highlight 3 primary drivers versus our expectations.
1st, though Q3 average occupancy grew sequentially to 86.7%, we did not see the expected typical seasonal occupancy lift. Therefore, the occupancy gap versus prior year widened from the 2nd to the 3rd quarter by 30 basis points to an average 70 basis point occupancy gap. In truck quarter, the year over year occupancy gap widened sharply in September with September period end occupancy approximately 115 basis points lower than prior year. 2nd, price competition driven by new supply was significant in pursuit of new residents in select geographies, most notably in secondary markets. Negative re leasing spreads in our portfolio widened in Q3 instead of our expectation that they would tighten relative to prior year.
As a result, RevPOR growth reduced sequentially from 60 basis points in the 2nd quarter to 40 basis points in the 3rd quarter year over year. And 3rd, ESL experienced discrete pricing challenges exacerbated by new supply. Corrective action plans are in progress. I would note that excluding ESL, our Q3 SHOP same store NOI performance would improve by over 100 basis points. In light of Q3 revenue trends and a lower occupancy start point entering the 4th quarter, our operators' plans call for aggressive pricing actions in pursuit of occupancy as we close out the year and set the base for 2020.
We are also evaluating actions at the Ventas level to improve shop performance, including selective dispositions and or capital investments. Turning to expenses and on a positive note, operating expenses grew modest 1.8 percent in the 3rd quarter. Our operators continue to mitigate wage pressures by jointly managing staffing and driving efficiencies and indirect costs. I'd also highlight our Canadian portfolio, which increased occupancy 40 basis points to 94.2% and grew NOI at a robust 4.7%. This performance underscores the health of Canadian senior housing market, which now represents nearly 25% of the SHOP portfolio NOI post our closing of LGM.
Given 3rd quarter results, we are revising our SHOP full year 2019 same store cash NOI guidance to now range from minus 4% to minus 5%. The guidance range implies a challenging 4th quarter given Q3 trends, a dynamic and competitive market and lower occupancy levels entering the 4th quarter. We do see upside in senior housing in the U. S. Given record levels of demand in Q3, a continued positive trend in new starts and attractive demographics.
Let's move on to our exciting office segment, which is approaching 30% of our NOI and currently represents over 26,000,000 square feet. Our overall office segment delivered attractive same store cash NOI growth of 3.7% in the 3rd quarter. And with year to date office growth of 2.9%, we're pleased to improve our full year office same store guidance. More on that in a minute. Our R and I business, which now exceeds 6,000,000 square feet, led the way for office in the 3rd quarter, increasing same store cash NOI by a stellar 10.6%.
Occupancy increased 2.90 basis points on strong lease up at our Wake Forest assets, while revenue per occupied square foot increased 7.6%. Our 4,200 and 20 Dunkin' development in the Cortex Innovation community associated with Washoe in St. Louis is now at 100% occupancy after only 16 months of operation, bringing Ventas' 5 in place Cortex buildings to 99% occupancy overall with a pipeline of incremental demand. R and I also benefited by a lease termination fee in Q3 in its non same store portfolio of $4,700,000 of NOI or slightly more than a penny of FFO. Turning to our 20,000,000 square foot medical office business.
MOV same store NOI increased by a steady 1.6% in the 3rd quarter. Operating expenses increased by just 20 basis points year over year in Q3, benefiting in part from utility savings arising from sustainability investments. We've seen a meaningful improvement in our MOB tenant satisfaction scores. While our trailing 12 month MOB tenant retention ratio improved to the company's highest on record. These office results are proof points of the various operational best practice initiatives Ventas is successfully implementing under Pete Bulgarelli's leadership that will drive sustainable growing cash flows.
On the heels of strong year to date results, we are pleased to raise our full year 2019 office same store NOI guidance to now range from 2% to 2.5%, driven principally by better than expected strength in R and I. On to triple net, where same store cash NOI increased by 2.1% for the 3rd quarter, driven by annual rent escalators across our diversified portfolio. Trailing 12 month EBITDARM cash flow coverage for our overall stabilized triple net lease portfolio for the Q2 of 2019, the latest available information, was stable at 1.5x. Coverage in our triple net seniors housing, post acute and health system assets also held firm with prior quarter. I would highlight the continued strong performance by Ardent for the Ventas owned assets and for the enterprise overall.
We are still on track with the approximately $10,000,000 net NOI impact from proactively addressing leases with select lower credit triple net senior housing operators. This impact appears in non same store results. As a result of year to date growth of 2.3% from the triple net full year same store pool, we're raising our full year 2019 same store cash NOI triple net guidance to now range from 2% to 2.5%. Turning back to Enterprise results. Normalized FFO per share in the 3rd quarter was a solid $0.96 The FFO performance versus 2018 was flat year over year adjusted for the $0.03 per share cash fee received in the Q3 of 2018 related to the Kindred Go private transaction.
We were active in the debt capital markets in the 3rd quarter. But we extended our average debt maturity to nearly 7 years and managed interest rate risk via issuance of 650,000,000 dollars of 3 percent senior notes due 2,030, which were used to retire $600,000,000 of 4.25 percent notes due 2022 To manage currency risk from the close of the LGM transaction, we also closed the CAD 500,000,000 unsecured bank term loan at attractive pricing. Our net debt to adjusted EBITDA ratio is 5.9x@quarterend. As expected, leverage increased sequentially from the 2nd quarter as we raised equity in Q2 to fund the LGM deal, which closed in Q3. I'll finish the prepared remarks with guidance.
At this late stage in the year, we're narrowing our normalized FFO per share outlook for the full year 2019 to now range from $3.81 to 3.85 The guidance midpoint of $3.83 is in line with our guidance range from the 2nd quarter call and at the higher end of our initial guidance range provided in February of $3.75 to $3.85 per share. We've also narrowed our overall portfolio same store cash NOI growth guidance for 2019 to now range from 0% to up 30 basis points, taking into account an increased guidance range on our triple net and office portfolios and the reduction in SHOP. Other assumptions underpinning our FFO guidance are largely the same as last quarter. Guidance includes the impacts of announced investments in capital markets activity to date. To close, the whole Ventas team is resolute in taking actions that will improve performance and deliver growth and value for the benefit of all of our stakeholders.
With that, I'll hand it to the operator to open the line for questions.
Thank you. Our first question comes from Nick Yulico of Scotiabank. Your line is open.
I guess first question is you had the commentary, Debbie, in the press release about you don't you think now your return to enterprise growth will occur after 2020. Are we to read into that that you're not expecting FFO growth next year?
Directionally, yes. We think that the growth will be deferred past 2020.
Okay. And then I guess as we think about this year, right, you had an Investor Day where you're pretty positive. You now had a tough quarter for seniors housing. You just remind us how often are you getting updates from your senior housing operators on the performance of your assets? And then specifically besides what you cited about potential sales of assets, what are the steps you've taken to address the issue that you're facing right now in senior housing?
Is it an operator issue? Is there something better that you can do in terms of predicting that business? That'd be helpful.
Sure, Nick. It's Bob. Let me start with the cadence of conversations with the operator, which I would describe as very regular. Our asset management teams are in, I don't call it, constant contact with our operators. But absolutely is a fact is the market changed pretty rapidly in the Q3.
And even the boots on the ground, as I described, the operators were surprised by the nature of the change, and particularly the occupancy trend in September, which we highlighted in the prepared remarks. And so it's really that dislocation as we then review the outlook, the entry into Q4, the outlook for the year, that changed. In those circumstances, changes pretty rapidly. So what are we doing about it, the second part of the question? Certainly, at an operational level, all of the operators are actively engaged in, I'd call them asset by asset recovery plans, very much focused on revenue, and we continue to engage with them on that.
At a portfolio level, clearly, there are different options we have, including selective dispositions of potential underperformers as we look forward and see the profile in various submarkets. Capital investments clearly, as we think about ways to continue to compete and be competitive in select markets and continuing to invest behind opportunities that drive growth. So it's the same playbook as you would expect. And I'd say the frequency of dialogue is very, very regular.
I guess just it's helpful. I guess just one follow-up
there is that, you talked about, Bob, that negative leasing spreads widened in the quarter instead of tightening, which you were forecasting a tightening. What gave you confidence to forecast a tightening? Was that something you were seeing? Is it something your operators were telling you? And how did you end up seeing that negative surprise in the quarter?
Great. So if you back up to our guidance early in the year and then reaffirms last quarter, in the last half of last year, the second half of last year twenty eighteen, we did see aggressive price discounting. We saw the re leasing spreads widen in the second half as a consequence, and we saw occupancy sequentially grow nearly 80 basis points in the 3rd quarter last year. So that was the backdrop. In that context, all of our operators consistently believed the ability to price, I'd say, more surgically in this second half and therefore not have a significant discounting environment and have an improved narrowed releasing spread.
That was the predicate of the prior guidance. What indeed has happened is, and it's really, I call it, the cumulative effect of the openings that have been coming online over the course of time has driven that to be more price competitive, more widespread in the discounting. And therefore, as you see in our rate, sequentially a softening in RevPOR as opposed to growth and a year over year wider releasing spread rather than narrower. So fundamentally in the Q3 that was a change both in the market versus our expectation.
Okay. Thanks everyone.
Thank you, Jack.
Our next question comes from Nick Joseph with Citi. Your line is open.
Hey, it's Michael Bilerman here with Nick.
Hi, Michael.
Good morning. So as sort of piecing some things together, backing away from the growth for next year, how much of that is the weaker 3Q and 4Q results playing into the run rate versus the expectation that same store NOI for SHOP? Because it appears that the rest part of your businesses, which is almost 2 thirds of the company, are doing fine and are actually probably in line to ahead of where your expectations are. So how much of this shift is due to the run rate versus the expectation that SHOP is going to be negative again in 2020 off of a down, call it, 5% this year?
Yes. I mean, Michael, thanks for your question. I'm not sure I totally understand it, but in terms of
I guess, if they may just from the standpoint of the Street right now is at $3.93 you're going to do $3.83 for earnings this year, right? So the Street was expecting up $0.10 which is probably somewhere realm of where you thought you were going to get growth in FFO. Now you're saying you're not going to have FFO growth. And there's 2 parts of it, right? It's getting slower into the year because you've had very weak SHOP results.
So the run rate is lower. That accounts for, I don't know, I don't know if that's $0.05 or $0.10 And in addition, I don't know how much cadence you have for 2020 SHOP. And I know you're not giving 2020 guidance, but I don't know how much of your perspectives have changed in making the statement that you're going to defer the earnings growth, right? So arguably, the number for next year is going to be below $383,000,000 And I'm just trying to piece together how much of that is the weakness that you have in the second half of this year, what you experienced in the Q3 and what you're forecasting in the Q4? And how much of it is a change to how you're looking at 2020?
Okay. I mean basically, what we want to do is address 2020 and our guidance and all the components when we normally do in the Q1. And when we do that, we want to have some of the key underpinnings of that, including the 2020 budgets, the rate letters and so on and see where we end the year. So I would just defer that conversation. We want to give you the guidance and the parts when the guidance is ready and reliable for 2020.
And that will be in the Q1.
Maybe we can address it this way. So you have an implied 4th quarter guidance of $0.88 to $0.94 right, based on what you provided for the full year and where you have year to date. That $0.88 to $0.94 is down from the $0.96 $0.97 that you've experienced in the prior two quarters. Still a pretty big range, right? $0.06 is, you're talking about 6%, 7% in terms of a range for the 4th quarter.
And one would have imagined you would have gotten the benefit of all the investments, accretive investments that you've made and closed recently. So maybe Bob, you can walk through the delta of getting from 3Q reported FFO of 96 down to that 88% to 94%. Same store is effectively from what we can tell implying shop down about 4% sequentially, down about 7.5% year over year based on your guidance numbers, which would only be a couple of pennies. So maybe we can start talking about that part.
Yes. Well, I'll also address a bit of your first question. The lower finishing point this year as now embedded in our outlook and the implication for, therefore, 2020 is real. I mean, the start point of where you finish, as we're seeing in the Q4, fundamentally determines where we are in 2020, and we've lowered that start point. So that's a fundamental input obviously into 2020.
Let's use the midpoint for easy math sequentially to the second part of the question, which is a 96 percent in the 3rd quarter becomes 91% or 92% with rounding depending if you round up or round down in the 4th. And what's driving that? And number 1, most notably, shop and property, and that is the largest driver. We highlighted in the Q3, we also had a term fee in R and I of roughly a penny. And between those two things, therefore property and that term fee, you bridge the gap.
So that's the sequential midpoint description. And again, the range is really predicated principally on the SHOP revenue outturn in the Q4.
But you should get the benefit
of buying Hopefully, that's more helpful than my answer to you.
Again, I understand that the ones that go down shop and the lease term fee, but you bought a significant amount of assets, you did the loan on Colony, you raised equity in June that was accretive, like all of that should you did debt refinancing, all of that should help sequentially, no?
Well, I mean Colony was in the 3rd and, Le Grute Marese is expected to be break even in 2019. So I think you're those are reflected. And so Bob's simplification of 3rd to 4th is are the represent the principal drivers.
Okay.
Thanks.
Thank you.
Thank you. Thank you. Our next question comes from Vikram Malhotra of Morgan Stanley. Your line is open.
Thanks for taking the questions. I have 2 questions. So just first going back to the question on FFO growth. I'm still not understanding if you're benefiting, I get Maurice is not a positive this year, but it should be a positive next year. Colony should be a positive next year.
Your O and I and office and MOB should all be a positive next year. So effectively, I'm not sure how you're projecting shop into 2020 right now to come to no growth. If in the Q3 itself things were so volatile and it's just tough to get a near term read, I'm not sure how you're forecasting into 2020 what it looked like. So if you could just walk us through to get to that no growth in FFO, like what's in that statement, what's embedded in SHOP for next year?
Well, I'd really be delighted to do that and we are going to do that in a disciplined way with all the components when we give our 2020 guidance as we historically have done in the Q1. And so, I know I'm asking you to be patient with us, but that is the disciplined process that we have historically gone through after we see how the year ends. We want the guidance to be ready and reliable. And so I would encourage us to talk about it when we give 2020 guidance in the Q1 with all the parts that you're looking for.
Okay, fair enough. But just because you said no FFO growth and obviously people are going to question. So fair enough. We'll wait for the details. The second question really is just around the SHOP, the changes that you're articulating in senior housing.
And there are 2 parts, if you can bear with me. 1 on the SHOP side, it's obvious that there's probably a need for more real time data or maybe faster data because things could be so volatile as they were in 3Q. So apart from like longer term things like putting in CapEx, etcetera, and selling assets, like what can you do or what are you contemplating to get data in a more real time manner in the SHOP side? And then on the triple net side, if you could address this, you've baked in $10,000,000 of potential restructurings. But if you look at the EBITDAR, and in place EBITDAR, I'm assuming, is well below 1%.
I know you have several years on some of your leases, but how should we get comfortable that additional lease restructurings will not be required in 2020 2021?
Yes, I'll take the first. So reminder, obviously, we are reliant in the SHOP business on the data from our operators. As you speak to real time, that is by definition coming through our operators. And therefore, there is by definition going to be some timing between their receipt of that and ours. I would say the clock speed is pretty good.
That said, there are indicators, which is such as occupancy, which one can see more, call it, weekly. On the other hand, things like Rev 4 and your OpEx really are both intra quarter and quite dynamic, but also you really need to see the whole quarter play out before you can get a strong beat on it. So I would agree fully that data continues to be in the industry a challenge and one that we continually endeavor to get better on. But in some cases, such as NOI and OpEx, you really need to see it through the quarter. Debbie, you want to take a second?
Yes. In terms of the triple net portfolio, we've given our expectations for 2019 with approximately a net $10,000,000 impact. We're materially on track for that. In terms of looking forward, again, that's a part of the 2020 guidance that we want to provide to you when we provide all of our guidance. And we have a significant amount of our triple net senior housing tenants, the likes of Brookdale, which is the largest one, which obviously has a very significant ability to pay rents and that's a large portion of the senior housing triple net and many other operators who have other credit and or coverage, where we feel comfortable with the go forward rent obligations.
Okay, great. Thank you.
Thank you.
Thank you. And our next question comes from Rich Anderson of SMBC. Your line is open.
Thanks. Good morning.
Hi, Rich. Good morning.
Hi, how
are you doing? So I know just out of curiosity, I know you typically wait to the Q1 for guidance, but these aren't typical times, I guess. And I wonder if you would give any thought to maybe being a little bit early in that process, say pre end of the year to provide an outlook into 2020 sooner than later, just because of the uniqueness of the situation. I would just offer that as a suggestion, but not a question. My question really is 4% to 6% for the 5 years, how much is that disrupted from your Investor Day?
Do we assume that is a different range going forward or do you stand by the 5 year outlook still?
Yes. Thanks, Rich. I'll let Bob follow on. But basically right now, our real focus is closing out 2019 in the way that we've outlined here today, taking steps to improve performance and also position us for the upside in senior housing. Obviously, to the extent that and we want to get a good 2020 and we want to have it be given to you which you deserve when it's ready and it's reliable.
And there are many inputs that will go into that. And so obviously to the extent that our 2020 outlook has changed due to changing circumstances that would have implications for the 5 year outlook.
Okay. But
let's start with getting you a good 2020 that you can feel good about.
Okay. Bob, are you going to add something? I missed I didn't know.
No, no. Okay.
And then last, and Bobby, you had said, the market changed dramatically in the 3rd quarter. And I'm curious as to perhaps why. The supply has been high, but it hasn't really changed much from the second to the third quarter. I guess you're saying the behaviors of your competition have changed. And would you say, that this is perhaps a condition of the geographical footprint of yourself?
Or do you feel like this is more of a holistic sort of national conversation?
Yes. Well, you rightly say we knew supply was coming. That's not news to us. I think it's the cumulative impact of what we've been seeing over the last years, which seems to have taken a bigger impact, made the market tougher, particularly on selling. And then within that, how our operators and others compete particularly on price seems to have become tougher in the quarter.
It is clearly thematically when you look at the net data, which again is the only industry data that we see, there was some sequential occupancy growth. Ours, in fact, was better than that when you look Q2 to Q3. But both pricing, as measured by Nick, and occupancy continue to be flattish or challenged. So without better industry data than that, it's hard to say really overall for the market, but certainly in our portfolio, in the markets in which we compete, we did see a change and how we need to compete in that needs to change.
Okay, fair enough. Thanks very much.
Thank you, Rich.
Thank you. Our next question comes from Michael Carroll of RBC Capital Markets. Your line is open.
Yes, thanks. Bob, I just kind of want to dive into that last question that had related to the impact of supply. Was there more supply delivered this quarter? Or was the issue that your competitors are just more aggressive on price and Ventas was not and you lost more occupancy relative to those competitors? Yes.
Well, it's always important to note that the openings in a quarter, though important, it's not a flash to bang that's immediate. It takes time for those to lease up. And historically, we've talked about 18 to 24 months. I don't know if that rule of thumb applies anymore simply because the cumulative amount of new openings has been so significant over the last couple of years. So I would not I would point to the cumulative impact as opposed to some elevation in the quarter itself.
Then how folks compete? By definition, new openings come in the market in the submarket. The whole submarket for those existing operators will see an occupancy drop. It's kind of on a pro rata basis. It's then how do you compete within that.
And I would say in certain geographies, we did lose share. I think it's fair to say. And hence back to the asset by asset view of how do we compete and pricing within that most notably. And secondary markets, if I were to point to markets, where we saw again, these are perhaps more price sensitive markets as well, but also where the deliveries came first. That is where we're seeing the greatest price competition and the greatest impact on Rev 4, the releasing spreads and NOI.
So hopefully that answers your question.
Yes. And then what I guess talking about the I think the changes that I think Debbie made in her prepared remarks and I think that you referred to in the Q and A also. I guess what specific changes is Ventas pursuing? I think the ones that you highlighted seemed like stuff that the company has always done investing in the properties and pursuing, I guess pruning. Are you planning on cutting rate also to gain more occupancy?
Is that one of the more meaningful changes? Yes,
Mike, I'll call it the operational strategy, certainly incorporates more aggressive pricing in the Q4 in an effort to win that resident. And so that is definitely in the plans, as distinguished by what I'll call them at the overall portfolio level actions that we can take, which you rightly mentioned. So at the operating level, at the asset level, pricing is critical for us to compete and change the trajectory. Okay.
And then were you surprised that operator started offering more concessions? I think that I believe Ventas has mentioned and obviously other REITs and operators have said that the market has been fairly disciplined in not offering those concessions. Has something changed this quarter versus prior quarters?
Yes, by definition. And that was one of the 3 predicates of why the guidance is different for us than our assumption. Again, second half of last year, more widespread discounting. Expectation by our operators and us and others, I believe that, that would be more targeted in the Q3 than the back half of this year. And that's not what we're seeing quite the opposite, a widening in a more competitive market in the pricing.
So quite different.
Right. And as a result, even though sequentially we grew more than NIC in the Q3, we did not build occupancy with the seasonal lift and power that we would typically see as a result.
Right. Hence widening the gap year over year.
Okay, great. Thank you.
Thank you.
Thank you. And our next question comes from Jordan Sadler of KeyBanc Capital Markets. Your line is open.
Thank you. Good morning.
Hi, Jordan.
Good morning.
How are you? I'm not going to beat a dead horse. Can you can we switch over to the triple net portfolio, the same store NOI growth there? Guidance for the full year moved up pretty significantly by about 125 basis points, I think, Bob, at the midpoint. What's sort of driving the change there?
I feel that's like a pretty stable predictable business.
So we're still alive and kicking, so you're not beating a dead horse. In terms of triple net, I would just say that as we said at the beginning of the year and in Bob's remarks that some of the all of the $10,000,000 net impact in NOI on the discrete set of assets that we've talked about is in non same store and FFO and therefore outside of the triple net pool. And we had talked about that I think at the beginning of the year when we made the simplifying assumption around the net $10,000,000
Okay. So it's the $10,000,000 was previously in and now that's out. Did I get that right?
It was remember we talked about it being a simplifying assumption within, but we noted that if there were dispositions or transitions, then it moves to another category and that's what we've called out this quarter. Right.
Okay. So that's out. How much of the $10,000,000 in adjustments has crystallized at this point last quarter? I think you had said $3,000,000 Bob. And then what is what's the annualized impact of the total 10,000,000
dollars Yes, Jordan. Yes, to keep it simple, I'd say the 4th quarter impact is approximately 4,000,000 dollars and $10,000,000 is the 2019 impact.
But if I think about the annualized impact of the $10,000,000 adjustment, so the incremental adjustment to 2020, for example, the annualized impact from the $10,000,000 of adjustments will be $25,000,000 So an incremental $15,000,000 to next year?
I'm not sure how you got that number.
Well, are these an annualized is the $10,000,000 an annualized number? Is the adjustment to
the year? No, it's a 2019 number, and it started in the back half of the year principally and is $4,000,000 in the 4th. Right. So it's not an annualized number.
Right. So I'm just curious if you annualized what the rent adjustments were, right? So annualized rents are falling by a total of 25 as a result of those adjustments or
it has to
be more than $10,000,000 obviously, right?
Yes, correct. And ceteris paribus, you can annualize $4,000,000
Okay. That's just fair. Okay. And then the other guidance thing that I noticed in the guidance was that previously you'd maintained that there were no changes to the holiday lease contemplated in guidance. Is that still the same?
Yes. Yes.
Okay. I just didn't see that called out. And then lastly on the balance sheet, leverage at 5.9x, did you guys look to the ATM at all in the quarter or since quarter end? And then how should we be thinking about the balance sheet going forward, Bobby?
Yes. So, Five9, really a function of the close of LGM in the quarter. So very much as anticipated, very much within the range of 5 to 6 that we've operated within a long time. So we're quite comfortable there. We did not incrementally do ATM in the quarter.
We had last earnings call described a little that we did early on in the Q3, but we didn't do any after that. Simply, we didn't have uses. So that's the rationale. But we're very comfortable with where we are.
Okay. I'll yield the floor. Thanks.
Thanks for the questions.
Thank you.
Thank you. Our next question is from Steve Sakwa of Evercore ISI. Your line is open.
Thanks. Debbie and Bob, I just wanted to maybe switch to expenses in the SHOP portfolio and just sort of what you're experiencing on the labor front and sort of how you maybe see that trending as a positive, negative or kind of maybe consistent moving forward?
Yes, Steve. So a nice thing to talk about, I'm happy to talk about the OpEx. We grew OpEx year on year in the third by 1.8%. What continues clearly is underlying wage pressure, kind of mid single digit sort of range when you look at a per hour basis. And we've described how consistently we've been able to manage that number by staffing, operating model at the asset level, procurements and managing indirect costs and as a consequence, keeping that overall growth below 2%.
And that is year to date pretty consistently what we've seen across the portfolio. Clearly, if and if the economy continues as is and there's continued labor pressure and wages in the mid single digits range, we'll need to run that same playbook to keep the OpEx in the range that we've had. But it's been I give lots of credit to our operators doing a fantastic job on managing the OpEx space and keeping that below the inflation.
Okay. And I guess just second question on the R and I business, Debbie, as you sort of look out, just sort of the opportunity set today, I mean, how would you sort of describe it versus 3 to 6 months ago?
I'm going to turn it over to my colleague, John Cobb, who's on the ground, our Chief Investment Officer.
Sure. This is John.
I mean, I think what we're seeing is we're seeing our pipeline is still good on the development side with our friends at Wexford. We're seeing lots of activity and so forth there. We're still looking at a fair amount of acquisitions in both core markets and also in our university markets. Those have become a little bit more competitive, but we're definitely seeing a fair amount
of activity.
We have a great competitive position in the university research and innovation business and John and the team are doing everything humanly possible to maximize that competitive advantage that we have.
I guess just to quickly follow-up on the competitive nature. It sounds like on the acquisition front, is it new players coming into the business? Or just trying to get a little more color on maybe what's happening to pricing on those assets?
I mean, there's been some new competitors. There's always been competitors in all the industries that we play in. It just happens to be there's a little bit more right now in life science. A couple of private equity firms have formed some funds, but it's no different than I would say the last 6 months. I mean it's always been competitive.
It's just become a little bit more price compression.
Okay, thanks.
Thank you.
Thank you. And our next question comes from Joshua Dennerlein of Bank of America Merrill Lynch. Your line is open.
Good morning, guys. Good morning. I think in the opening statements, one of you mentioned ESL was weaker than expected. And just maybe add if you remove that, it would be about 100 basis points, if I heard that correctly. Can you maybe give some more color on what's going on there?
And if that's just for them or their markets or
Yes. So you're right. We did call out 100 basis point impact to the Q3 result from ESL. Thematically, what drove the ESL result is not different than what I talked about overall in terms of occupancy and pricing. I'd say a couple of things that are unique or discrete in this case.
1 is the footprint, which tends to be more secondary, tertiary markets. And 2 is ESL still, I would say, the process of implementing new models as it has had these assets and taken them over, including a new pricing model, which in the midst of, in the context of the tough market, made it even tougher for ESL in particular. But generally, thematically, the drivers are the same.
Okay. And are the drivers that were impacting SHOP this quarter consistent with what was going on in the net lease senior housing portfolio? Just trying to get a sense of where like 3Q 2019's coverage ratio might shake out and maybe the evolution kind of going forward. Should we expect that to trend closer to 1% or maintain the 1.1%?
Well, I would say the industry, irregardless of or irrespective of business model, is the industry. So to the extent that the triple net operators are seeing the same market conditions and cash flow at the assets has a similar profile, then yes, that would have an impact on coverage. As you know, we report on a delayed basis in terms of coverage. We haven't got yet the results from all our operators for triple net, so too early to say. But clearly, the underlying market is what drives ultimately that number.
Okay. And you're still confident that those coverage ratios over time would kind of be in a comfort range where you feel like the leases could kind of consist as they are? Or at what point would you like consider taking action?
Well, again, I would say in a normal market, if you're looking at EBITDARM coverages over a long period of time, you would want to see those in the 1.2 to 1.3 range, maybe 1.1 to 1.3, which is where we are. Over time, it really depends how you address different things, depending on what the circumstances are, credit is, whether it's whether they're pooled leases, what other credit supports you may have and so on. And those really determine how you would approach the situation if coverage becomes more compressed. We've talked about how we've addressed the discrete pool of those in 2019 and I think very effectively and that the largest percentage of this pool of triple net senior housing operators, we're quite comfortable with.
Okay. Thank you.
Thank you.
And our next question comes from John Kim of BMO Capital Markets. Your line is open.
Thank you. Question on the lack of enterprise growth next year. Does this contemplate Hi, Debbie. Does this contemplate major dispositions shrinking the company at all or any significant amount of operator transitions next year?
It's a fairly steady state look.
Okay. It still seems difficult to get to that lack of earnings growth. I mean, I think this question was asked earlier, but are there is there going to be another significant rent relief that you had similar to the $10,000,000 that you
had this year? And it looks like, for instance, on the LTACH, the
triple net coverage went down a notch. So I'm wondering if that's also part of your guidance.
Yes, I'll touch on the LTACH one. The LTACH was literally a matter of basis points that made the round change driven by both rent and the asset performance, but it's literally around. So there's no fundamental change in the LTACs.
Okay. Second question is just a follow-up on ESL. It still seems like the 100 basis point impact on your SHOP is pretty significant given the size of VSL. Can you just verify how significant they are as part of your shop same store shop portfolio? And any parameters on how significant the performance was?
Yes, roughly 10% round numbers, a little bit less of the SHOP portfolio is what they represent. Clearly, as you say, 100 basis points is a big impact. And so that year over year performance is double digits down. That is just by the definition of the math. So quite materially and quite notable.
But again, it comes back to the same drivers. I would highlight again secondary and tertiary type business model, slightly lower margins as a consequence lower RevPAR in dollars, so a bit more operating leverage as well.
Okay, that's helpful. Thank you.
Thank you, John.
Thank you. And to prevent any background noise, we ask that you place your line on mute once your question has been stated. Our next question comes from Steve Valiquette of Barclays. Your line is open.
Great. Good morning, everyone. Hi,
Steve. And
just a few more questions here on senior housing pricing dynamics. I guess I'm curious, were there 1 or 2 operators in particular that maybe triggered some of the more aggressive pricing? Or was it more widespread across a whole bunch of different companies with new supply? And also just to confirm, did you see any acceleration in situations where pricing became more aggressive from existing competition? Or was the more aggressive pricing primarily from new supply in the various markets as they try to build occupancy?
And then finally, would you consider the new pricing to be irrational? Just not to stir the pot too much, but has it gone to irrational levels or how would you characterize it? Thanks.
Well, I think, first of all, I won't point to any bad actors, say, for example, there's not 1 or 2 that are driving the market. I think, again, when there's a cumulative significant amount of new openings, of course, you have the new building opening, which it's quite rational to be aggressive on price to fill up the building, which is a relatively small investment relative to the cost of building and in opening the community. So that's not irrational. That certainly drives price competition. And that's not a new insight.
We've seen widening releasing spreads kind of talked in the mid to high single digit range, lower or declines, and that has accelerated. So I'd say just taking what we've seen and amping it up, amping it up. And again, not because of any one factor, I think, but the cumulative impact of what's happened over the last years.
Okay. I appreciate the extra color. Thanks.
No problem.
Thank you. And our next question comes from Nick Joseph of Citi.
It's Mike Bilerman again here with Nick. I was wondering just Debbie, you mentioned as you talked about 2020 steady state and the deferral of the growth from an enterprise from an FFO perspective next year largely was driven by the SHOP change, which we spent a lot of time talking about on the call. One of the things you talked about in Investor Day was having $2,000,000,000 of net investment volumes. And I just wanted to understand, when you're walking back the growth for next year, does that still assume $2,000,000,000 of net investment volumes?
Yes. Again, in terms of looking at 2020 and giving guidance or expectations and the components thereof, I feel very responsible to all of you to do so when that is ready and reliable. I couldn't feel more strongly about that, Michael, as can imagine. In terms of the deferral of enterprise growth, I would say that when I said steady state, it's simply what we have now, if you want to think about that.
Well, I'm just trying to piece together and maybe the bigger question is, this is an unfortunate situation that you've had to walk back and shop as much longer than you expect. And unfortunately, you have to manage other managers. So it's not even something internal that you can just fire someone or discipline someone for bad performance or oversight. But if I look at sort of the guidance and the FFO trajectory, you had an issue last year where numbers had to come down pretty significantly for 2019. You had an Investor Day where I would say you did the reverse, which was get people really excited about the future growth profile of the company.
You started talking down numbers a little bit on the 2Q call, went further at a conference in September, same things were a little bit weaker and then dropped today weaker results and a significant change for 2020. And so I can respect the level of wanting to be responsible and get on the numbers in action, but this is not a one time event. And so I really would like to understand from an enterprise perspective, what else are you doing? You talked about fixing things and maybe doing more dispositions or capital, but more so from your own guidance and financial perspective, what has the last 12 months taught you from that side? Yes.
It's amazing to be at this stage in grade and still be learning good lessons. I would say that again, we've always been known over long periods of time to be reliable and to be forthright. And those are values we hold dear. I would say that one of the lessons is certainly that in a dynamic market like we have now, we have to be disciplined even if people are asking for information earlier or more detailed information, we have to be more disciplined to make sure we have all the inputs that we believe are necessary to have confidence in what we are telling you. And that lesson is reinforced by today.
And we feel and have a deep responsibility to you and to our shareholders and to all of our stakeholders. And we that's how I would characterize really what we will do differently going forward and what we've learned.
And then I think the key point that we're all trying to sort of isolate is you've had the confidence to be able to tell the market today, we're not going to grow FFO in 2020 based on our trajectory of shock that we experienced in the second half and likely some element of what we expect for SHOP next year and we're going to please hold off until January, we'll give you all the details. I think some of the other pieces in coming to that comment like $2,000,000,000 of investment, that's where I think we're trying to put the pieces to the puzzle together, to at least understand in you coming and making the declaration of no growth for next year, what does that mean? Does that mean you should assume 0 acquisitions, which is, by the way, historically the way you used to do guidance versus Investor Day where you layered that into your growth profile? And so I think there's some it's like apples and oranges. And I think we're all just trying to understand the meaning of your growth and what's embedded, generally speaking, in that, what's in and what's not?
Right. And what we can say is that, that growth will be deferred. We there's a significant amount obviously that is driven by our senior housing. And with respect to the rest of it, we do want to come back to you at the right time and give you some of the more underpinnings of a range. And what components are that go into that range?
Right. I just want to make sure that when you said steady state, so in your comment about growth for next year would exclude net investment activity. Your comment about not getting to growth, does that include because obviously that could be accretive to numbers and I just want to forget about all the other components. That to me is a major one because it could add anywhere from $0.05 to $0.10 to earnings if you're buying $2,000,000,000 of assets financed accretively. So that to me seems like a major one just to make sure we understand.
I mean, we're as I said and you've interpreted correctly, Michael, in terms of steady state, we're just thinking about effectively organic without additional acquisitions, dispositions, capital markets, etcetera.
So all that could potentially be additive to whatever outlook. But on a steady state basis, current portfolio, current same store, that would lead to earnings FFO being down next year. From that point, you're going to work your ass off to improve operations at shop and work with your managers, find accretive investments. And so there could be a chance, a hope, that things could turn out better than that expectation. Is that a fair assumption?
Well, we are certainly focused 1st and foremost on delivering the 2019 we've outlined here. And we will absolutely the whole team is committed to working as hard as possible to improve performance and to get the benefits of senior housing upside, external acquisitions and so on. You have our commitment for that.
Okay. Thank you.
Thank you. Thank you, Michael.
And our next question comes from Derek Johnston of Deutsche Bank. Your line is open.
Hi, everybody. Good morning. Good morning. Hi. So we've covered a lot.
I apologize if I missed this, what are some options to optimize the SHOP portfolio? So as you look forward, how do you balance the possible disposition of underperforming assets versus reducing dependence on senior housing through growth in R and I and or maybe hospital investments, if you could speak to that for a second?
Right. I mean, there is a definite balance here because the leading indicators in senior housing continue to be very positive. There is a powerful upside in senior housing. We certainly can always optimize the portfolio and do things to improve performance. We also want to be there and have our shareholders be there to enjoy that powerful upside as it materializes.
So there definitely is a balance there as you've pointed out.
Okay. But as far as growth in R and I, we expect that should continue. But how about HIFUL investments in general? Is that a possibility as well?
Yes. Again, Bob talked about Ardent's performance, which has been good. That investment has done very, very well. And our new Montreal investment, of course, has 5 assets underway that we'll continue to invest in. So there are many good aspects of the portfolio and the enterprise that are going very well and we can obviously continue to build on those strengths while we also address where we are in senior housing.
Okay, Debbie. Thanks a lot. Thanks, everybody.
Thank you.
Thank you. And our next question comes from Lukas Hartwich of Green Street Advisors. Your line is open.
Thanks. Good morning.
Hi, Lukas.
Hi. On SHOP, do you have any ideas why there's such a large disconnect with the NIC data performance?
Well, on the one side on rate, I would tell you that, the rate from NIC is not effective rate, it's not RevPOR, we really disregard it. It's the RAC rate basically. So I think that that really should be kind of off the table. In terms of occupancy sequentially, we built occupancy 40 basis points. They built at 20 basis points.
The difference is a year over year comparison.
And I would only add that the coverage of NEC is not 100% of the country too in certain geographies. So as a representative, I think not complete.
Great. And then just one other. Can you compare and contrast the CapEx spend that is going into your SHOP and triple net senior housing portfolios?
Well, we know that Brookdale, for example, in the triple net portfolio is investing a significant amount in CapEx and through our agreement with them, we've committed to keep the assets competitive in their markets by doing some yielding investments in capital as well. Most of the triple net leases have requirements for CapEx spend. I would say in general our SHOP portfolio, which is higher end and higher rate by and large. We do tend to spend, call it, dollars 2,500 a unit. So very significant to keep the assets in good condition and with a high price point for the residents.
Great. Thank you.
Thank you.
Thank you. And our next question comes from Vance Vanacore of Stifel. Your line is
open. All
right. Thanks. Good morning. Hi.
So I'm
going to try and get a little more detail about the shop occupancy only because there seems to be a dramatic shift in occupancy from mid quarter to the end of the quarter that just no new supply doesn't really seem to account for. So can you give us a little more detail? Was that confined to specific properties and operators or geographies? Or is it something wired?
Yes. So it is a significant change, and it was significant even within the quarter and most notably in September. And that was a trend which is true across all the operators that we have in our shop portfolio. And at least in my experience, pretty unprecedented. So it's not specific to a geography either.
We saw again, I mentioned secondary and tertiary markets where more supply has come online earlier is where we see the most acute impact. But even in primary markets, you see similar trends. So that's why I keep coming back, Chad, to this notion of the cumulative effect. Is it a capitulation of some kind or not? Only time will tell.
But it is notable in that in its consistency as we look at it different ways.
All right. Then if this is wider spread, how has Ventas' expectation of a weaker shop in 2020, how does that alter your view of potential senior housing acquisitions in 2020?
Well, again, as we talked about, as it relates to 2020, we're not factoring in any of that in the conversation that we've had today. Over the past several years, we've been quite judicious about our senior housing investments. The vast, vast, vast majority of our investment activity has been in growing the R and I pipeline and obviously non U. S. Montreal based, for example, the LGM investment.
And so, I would say our expectation about investments is really based on a case by case basis. We remain positive on the fundamental long term growth in the senior housing business, but we've been very judicious about our investments in the senior housing business over the past couple of years.
All right. So what do you think optimal portfolio mix looks like down the line 2, 3 years?
Well, we've talked about this before and I would say that we hope to continue building our university based research and innovation business, where we expect to have excellent risk adjusted returns. We've always thought that SHOP should be in the U. S. Certainly somewhere between 20% 35% and that's been consistent over time. And I would continue to endorse diversification in all its manifestations, which again has the company is really benefiting from right now as you've seen the outperformance from office, some of the healthcare triple net lease business and so on.
All right. I'll leave it there. Thanks.
Thank you.
Thank you. And our next question comes from Michael Mueller of JPMorgan. Your line is open.
Hi, good morning.
Hi, Mike.
This isn't a 2020 question. But given the wide performance variance between the primary markets and the secondary markets, should we assume that you're going to shrink the secondary markets over time and ramp up asset sales?
I think as Bob said, if this is an outgrowth of earlier development in secondary markets that's now being felt, we want to make sure that we're taking operational operational action, pricing decisions and so on to compete effectively in the markets, while also preserving that powerful upside. And so those may be the first to change on a positive note. And we will look at all of those markets and all those assets on a case by case basis both operationally and strategically. So I don't think your conclusion is really directionally how we're thinking about it.
Okay, got it. And then the negative rent spreads, can you put some numbers around that just in terms of how they've trended?
That's a Bob question.
Yes. Last year, I would call it in the 7% range, this year closer to 10% down.
Got it. Okay. That's it. Thank you.
All right, Mike. Thanks.
Thank you. And our next question comes from Daniel Bernstein of Capital One. Your line is open.
Hi. I'll still say good morning. The sun is still shining outside.
Good morning.
Good morning. I guess I
have a question on that early supply and some of the rate pressures out there. Is it stemming from the merchant builders rather than the owner operators? If you build asset came online in 2016 and you're 3 years in and you're not stabilized, you're coming up against some of your probably your construction debt covenants. Is that where the pressure is emanating within the industry from kind of the merchant builder? Or is it again, I'm trying to understand how broad based the rate pressure is out there?
Yes. I think it's all of the above, to be honest with you. It's not, again, specific to anyone, at least as we see it, anyone operator or owner. It's more of an industry commentary than anything and a geography specific conversation.
Okay. And then I assume it's more on the AL side than the IL side or again, is it kind of
That's foreign distinction. Yes, absolutely. It's definitely AL. Again, that's where, as you know, the supply has come.
And where the starts have gotten the lowest, which is
Right.
And the most notable improvement, 9 years low, I think, in the latest data, the lowest in 9 years. And so IL is performing pretty well, actually. It's the AL that's seeing the pressure.
And so does that we're not going to get into 2020 acquisitions or guidance or anything like that, but from a just a broad perspective, does that then leave you more inclined to say continue to buy and build assisted living given where the starts are and again kind of continue down the path of more Rite Aid exposure versus triple net or has something changed in maybe where you would want to invest and how you would want to invest in seniors
As we've talked about in terms of our investment strategy, we are positive on the long term fundamental outlook for senior housing. We have invested judiciously over the past few years. We're building our research and innovation business with universities, which is our number one priority. And we'll continue to look at investments on a case by case basis as we see good what we believe is good risk adjusted return.
Okay. Okay. I guess we'll continue some of the conversation offline, not getting late.
I look forward to it.
All right. Thank you.
Thank you. So I want to thank everyone for their patience and participation in this call. As Michael eloquently said, we are aligned and are committed to working as hard as we can on behalf of our shareholders as we always have. And we really appreciate your continued support and trust. So we look forward to seeing you in November.
Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.