Good day, ladies and gentlemen, and welcome to Ventas Second Quarter 2019 Earnings Conference As a reminder, this conference is being recorded. I would now like to turn the call over to Juan Sinabria, Head of IR. You may begin.
Thanks, Tiffany. Good morning, and welcome Ventas conference call to review the company's announcement today regarding its results for the quarter ended June 30, 2019. As we start, let me express that our 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 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 ks for the year ended December 31, 2018, and the company's other SEC filings. Please note that any 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, www.ventasreit.com. I'll now turn the call over to Deborah Akyafarra, Chairman and CEO of the company.
Thanks, Juan, and good morning to all of our shareholders and other participants. Welcome to the Ventas Second Quarter 2019 Earnings Call. I'm happy to be joined on today's call by my talented Ventas colleagues as we discuss our enterprise momentum, our productive second quarter, our increase to full year 2019 expectations and our recent addition to our outstanding Board of Directors. I'd also like to reinforce our commitment to growth in 2020 and emphasize how well positioned we are to deliver superior total return in the coming years. First of all, a sincere thanks to all of who attended our Investor Day in June.
The whole 24 hours we spent together at our R and I knowledge community in U City, Philadelphia were jam packed with new information, insights and incredible connections. I'm so glad we could spend time with you showcasing our deep and broad team, our best in class partners and the power of our diverse high quality portfolio. Turning briefly to our 2nd quarter results. I'm very pleased to report another solid quarter of normalized FFO, dollars 0.97 per share resulting from property growth and excellence in our office business. Building on our strong momentum, we are also delighted to increase our full year guidance to $3.80 to $3.86 per share, an increase of $0.03 at the midpoint from our prior range.
Now I'd like to address the current activity and future opportunities at FEMTAS. Through my 2 decades, we followed a consistent successful strategy that endures. We strive to combine a high quality diverse portfolio benefiting from strong demographic demand with industry leading growing partners in all our verticals and let our collaborative and experienced team get after it. Our goal is to produce consistent growing cash flows and superior returns on a strong balance sheet for you. The enduring Ventas advantage has enabled us to outperform and deliver 23% compound annual return for 20 years through multiple cycles.
Now, following a period where we have substantially elevated our portfolio and partner mix, we are ready to pivot to growth in 2020. We have identified 4 building blocks that underpin our confidence in Ventas' future growth and success. These are core portfolio performance, the powerful up side in senior housing, meaningful accretive external investments and contribution from our exciting research and innovation business as we build, open and lease up our near term development pipeline. Bob will address the first two building blocks in his commentary and I'd like to focus my remarks on our accretive external investments
and our R and I pipeline, which
combined for nearly $3,500,000,000 Of that total, dollars 2,500,000,000 represents investments above and beyond our university based research and innovation announced development projects. Year to date activity follows our long standing successful investment framework, which blends investments in trophy assets, accretive quality assets and well structured high yielding assets to produce growing cash flows and increasing value. Let me unpack these attractive investments we've captured. First, we've acquired over $200,000,000 in trophy assets in our office business. In addition to our recent investment in Cambridge, we recently acquired a newly constructed Duke Health asset, which expands our investment medicine.
It also broadens our existing relationship with Duke University and Duke School of Medicine, which is an anchor tenant in our nearby Chesterfield This increasing convergence of research and academic medicine, which is also evident in the Penn UCD market PENNU City
market we toured on Investor Day,
shows why Ventas is incredibly well positioned to lead in the medical office, academic medicine, R and I and university space. 2nd, we announced our exciting and accretive investment in 31 Class A Apartment Life Senior Living Communities in the desirable Quebec market with Le Grout Maurice at an attractive valuation of $1,800,000,000 These 31 large scale communities provide an active lifestyle for seniors with high end amenities and a la carte services. As a result, they lease up quickly to a younger demographic. The 31 communities are expected to deliver 4% compound annual NOI growth over the next 5 years. We project incremental NOI growth from 5 in progress LGM developments, which adds $300,000,000 of investment activity to our announced amount.
We also have an exclusive partnership with LTM to jointly develop and own additional communities over time to meet the robust needs of the rapidly growing senior population that lives in senior housing in large percentages in Quebec. We have already closed the first phase of our LGM partnership and look forward to completing the remaining aspects of our investment in the Q3. Last, we were delighted to close a $490,000,000 investment in the secured $1,500,000,000 Colony Capital refinancing in Q2. This high yielding 9% investment is well structured and supported by a large diverse pool of 156 medical office buildings, senior housing and healthcare assets. The second building block of our forward growth plan I want to share is our $1,500,000,000 near term development pipeline in our university based R and I business.
So far this year, we've announced 5 specific projects totaling nearly $900,000,000 The projects are with top tier universities who are leaders in scientific research and academic medicine and should be delivered in the 2021 to 2022 timeframe. These developments establish or expand powerful knowledge communities for our existing relationships with Penn, Drexel and Wash U. They also create the nucleus of new knowledge communities with additive relationships with the University of Pittsburgh and Arizona State University, each of which is in the highest ranks of research funding in the U. S. We are excited about all of the new projects, but since you all know I'm a proud Pittsburgh native, I'd like to highlight the Pitt project today.
The Pitt Immune Transplant and Therapy Center will create a research, academic medicine and innovation hub anchored by the University of Pittsburgh to house groundbreaking immunotherapy research and collaboration with nationally recognized healthcare leader, UPMC. The PIG transplant and therapy center development is already well underway. As we look forward to the future in our research and innovation business, we see incredible opportunities we are well positioned to capture. In our immediate sites are the remaining projects approximating $600,000,000 in our current pipeline that we expect to commence within 12 months. Beyond our near term pipeline, we control adjacent land that supports over $3,500,000,000 or 6,200,000 square feet of incremental development opportunity.
And finally, our university partners own additional on campus land that we can build on or acquire to facilitate further expansion as exemplified by our Drexel School of Nursing and Health Professions built to suit project. In addition to growing and improving our portfolio of diverse research, senior housing and healthcare properties, we remain equally, if not more focused on aligning with best in class partners. Uniquely in our business, our partners are key ingredients to our success. We are proud that we have existing development partnerships with best in class Wexford Science and Technology who is so well regarded by top universities nationally for designing, developing and delivering powerful knowledge communities that meet their needs. And we value our long standing partnerships with Atria Senior Living who demonstrated once again at our Investor Day its differentiating skill and scale that make Atria a winner in senior housing as well as our strong partnership with PMB, a leading medical office partner who develops and manages our trophy center asset in Downtown San Francisco.
Finally, you experienced firsthand the power of our ongoing collaborations with universities like Drexel and 10, innovators like the Science Center and gene therapy companies like Amicus and Spark when we were together in Philadelphia's U. S. City market. Now we're excited to join forces with Luc Maurice, a well regarded brand developer and leader in the Canadian senior housing market. Both Ventas and LGM began their stories in 1998 and have enjoyed parallel success in building sustainable respected firms.
I recently had the opportunity to visit with Luke and his leaders at their offices in Montreal and I continue to be extremely impressed by their track record, ethics, reputation, engagement, capabilities and plans for the future. When we close our partnership in full, I can't wait to tell them so, hopefully in French. It is really a privilege to collaborate with these industry leaders who we are proud to call our partners. We will continue to invest in our mutually reinforcing success. Lastly, let's talk about our great Ventas people who are of competitive advantage for us.
At Investor Day, you saw firsthand the breadth, depth and collegiality of our team. I'm continually amazed by their integrity, intelligence and work ethic. And that's all the way through the organization. They are truly committed to Ventas and to each other. Luckily, I'm not the only one who recognizes the outstanding capabilities of the Ventas team.
Bob Probst, our CFO, was named Public Company CFO of the Year. Those of you in the REIT space can certainly see that Bob is one of the best CFOs in our business. It's fantastic that his excellence was recognized across all industries by Financial Executives International. Go Bob. Another vital aspect of our Ventas people is our diverse and independent Board of crucial to our long term success.
Today, crucial to our long term success. Today, we are excited to announce the appointment of Sean Nolan as the 10th member of our Board. Sean is a repeatedly successful life science and pharma executive. His unique and complementary insights and experiences will add to our depth and enhance our decision making and opportunity set in our fast growing research and innovation business and our overall enterprise growth. This is a terrific time to be at Ventas and to invest in Ventas.
Our business model, which is broad and diverse, gives us the continual opportunity to find investments that add value and drive the company forward. These opportunities are right in front of us. Our businesses are supported by powerful demographic demand. Our valuation has upside. We have a strong financial condition and attractive dividend.
We have identified the building blocks that will support our future growth and we know how to execute on our plans. In closing, with 2 decades of perspective and outperformance through cycles, the Venkat's advantage of our high quality portfolio, our best in class partners and our excellent team gives us potent confidence in our ability to deliver outstanding performance in the coming years. We remain committed to and focused on pivoting to growth in 2020. With that, I'm happy to turn the call over to our CFO of every year, Bob Probst.
Thanks, Debbie. I'm happy to report solid second quarter results driven by growth from our high quality, diversified portfolio of senior housing, office and healthcare real estate. The year is playing out much as we expected across our property portfolio and as a result, we are reaffirming our full year 2019 property level guidance. Looking at the Q2, our total property portfolio delivered same store cash NOI growth of 0.3% in the 2nd quarter, with office and triple net leading the way, and all of our segments performing in line with our expectations. Let's take a deeper look starting with our shop business.
Shop same store cash NOI in the 2nd quarter was 2.9% lower versus prior year, within the range of our full year NOI expectations of flat to down 3%. Q2 same store occupancy was solid at 86.4%, representing a 40 basis point occupancy gap versus prior year. As a reminder, the year over year occupancy gap averaged 80 basis points for the full year 2018. Meanwhile, Q2 RevPOR grew 60 basis points year over year. Re leasing spreads were impacted by price competition and trended consistent with last quarter.
We believe that RevPOR in the second half of the year should benefit from lapping price discounting that accelerated in the second half of last year. Operating expenses grew a modest 1.9% in the second quarter. Our leading operators continue to expertly manage staffing and drive efficiencies. That said, we maintain our view that full year OpEx will increase in the 2% to 3% range given a tight labor market. At a market level in the U.
S, we continue to see NOI growth in submarkets such as South Orange County in Los Angeles and Eastern Long Island in New York, mitigated by declines in markets such as Chicago and secondary markets. That said, even in challenged MSAs, we see pockets of occupancy and NOI growth at the submarket level, for example, in Northeast Atlanta. Canada once again was a strong performer in Q2 with occupancy of 93.5%, NOI growth of 3.6% in the quarter and in the first half. This performance underscores the health of the Canadian senior housing market and the quality of our portfolio north of the border. Key impetus behind our strategy to further enhance our position via the exciting LGN portfolio in Quebec.
We maintain our full year 2019 same store SHOP NOI guidance of flat to minus 3%, though expect to trend toward the lower end of our range. Big picture, although we are still in the midst of elevated new openings, we believe strongly in the powerful upside in senior housing and its contribution to our 5 year growth. As portrayed in Philly, we expect occupancy to inflect positively in the second half of twenty twenty. Through our proprietary data analytics, we can look ahead and see that demand is increasing and that supply is easing. As evidenced by our forecast, that new openings across our 194 submarkets should improve by about 15% in 2020 versus 2019.
In fact, reaching the best level of new deliveries since 2015. Looking further ahead, improving new construction starts, accelerating demand and significant operating leverage underscore our conviction that over the next 5 years, our shop business can grow same store cash NOI at a 4% to 6% CAGR. On the triple net, where same store cash NOI increased by 1.5% for the 2nd quarter, driven by annual rent escalators. Excluding the impact of a prior year cash fee of $2,500,000 arising from the 2018 Brookdale lease extension, the company's triple net portfolio grew 2.9%. Trailing 12 month EBITDARM cash flow coverage for our overall stabilized triple net lease portfolio for the Q1 of 2019 related to available information was stable at 1.5 times.
As we foreshadowed on our last call, given current industry conditions, trailing 12 month coverage in our triple net same store seniors housing portfolio moderated to 1.1x. Coverage in our post acute portfolio was steady at 1.4x. And finally, Arden continues to deliver terrific results, driving a 10 basis point coverage expansion to a very strong 3.1x. We continue to estimate a $10,000,000 impact to Ventas' 2019 NOI through transactions addressing certain smaller low coverage senior housing triple net tenants, with approximately $3,000,000 crystallized year to date. Potential transactions include operator and or business model transitions.
An example effectuated in the Q2 was the transition of 10 assets on the East Coast from a smaller triple net tenant to ESL under a management contract. We see upside in the cash flows at these assets over time. 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%. Moving on to our highly valuable office segment, which includes our university based research and innovation and medical office businesses and represents 28% of our NOI. Our Office segment delivered strong same store cash NOI growth of 2.9% in the 2nd quarter.
Our R and I business led the way, increasing Q2 same store cash NOI by a robust 4.6% driven by occupancy gains of 120 basis points on strong lease up at our Duke and Wake Forest assets, together with revenue per occupied square foot increasing 3%. As an example, in Q2 of the strong demand for on campus research space, Penn Medicine took possession of 38,000 square feet of lab space at 3,701 Market Street in Philly, replacing the Science Center, which expanded to 50,000 square feet in the newly completed 3,675 Market Street Building. Both buildings are now over 97% leased. We affirm our full year guidance of 3% to 4% for R and I same store NOI, trending towards the high end of the range after a strong first half of the year. Turning to our medical office business, MOB same store NOI increased by a solid 2.4% in the the practice initiatives.
Some green shoots of these efforts include very strong tenant retention in Q2 of 92% and sequential occupancy growth to nearly 91%. Operating expenses decreased 1.4% year over year, reaping the benefits from utility savings arising from sustainability investments as well as lower repair and maintenance costs. We are enthusiastic about our MOB business and reaffirm our full year guidance of 1% to 2% for 2019 MOB same store NOI. On a combined basis, we reaffirm our office portfolio 2019 same store cash NOI guidance range of 1.5% to 2.5% with the expectation to trend to the higher end of the range. Pulling back for a minute, you'll recall that core growth defined as our triple net MOB and organic R and I performance is a fundamental building block of our 5 year growth expectation.
We are steadfast that core will be an important growth contributor. Our diversified triple net portfolio will benefit from escalator driven growth, while Pete and the office team are building momentum in MOB and going from strength to strength in the R and I operating portfolio. Turning back to the year now, our overall company's 2nd quarter financial results and our increased 2019 guidance. Normalized FFO per share in the Q2 was $0.97 The FFO performance versus 2018 was primarily the result of property growth as well as $0.02 from the recognition of cash profit on Paragon warrants, attendance in our UMB knowledge community and another proof point of the attractiveness of our R and I tenants. Q2 results were also affected by the earnings drag from the LGM equity offering in early June.
I would also note that year over year, we are lapping the Q2 2018 payoff of the Arden loans and related fees. We were active in the capital markets in the 2nd quarter. We raised nearly $800,000,000 of equity in early June to fund our LGM investment and followed on in July with roughly $80,000,000 raised on our ATM to partially fund our Net Colony investment. We also tapped the debt capital markets, issuing $450,000,000 of attractively priced 5 year bonds at 2.65 percent with proceeds used to retire bonds maturing in 2020, thereby extending the duration of our debt portfolio to approximately 7 years. As a result of these actions, our net debt to EBITDA ratio improved 30 basis points sequentially to a robust 5.2x at quarter end, principally as a result of the timing of equity raised in early June, the advance of the July closing of the first phase of the LGM transaction.
Let's close with guidance. We're happy to raise our normalized FFO per share outlook for the full year 2019 to now range from $3.80 to $3.86 a $0.03 improvement at the midpoint from previous guidance of $3.75 to $3.85 per share. As just discussed, we are also reaffirming our property portfolio and segment level same store cash NOI growth for 2019. Assumptions underpinning our FFO guidance are largely the same as last quarter with a few notable updates. 1st, guidance now includes the impacts of announced investments, including Lagroup Maurice and the Colony loan investment and associated capital markets activities.
The second and final phase of the LGM transaction is expected to close in the Q3. 2nd, we now expect to generate $600,000,000 through 2019 dispositions and receipt of loan repayments, up $100,000,000 from prior guidance from expected sales of non core senior housing operating assets at attractive pricing. Approximately $360,000,000 of disposition proceeds have been realized year to date. Final items to noted guidance include increased premium costs for property and casualty insurance as a result of our August renewal and a tight insurance market. Our 2019 outlook also assumes $370,000,000 weighted fully average fully diluted shares.
No new capital market activity is included with the exception of Canadian debt funding connected with the completion of the second phase of the LGM transaction. To close, the Mintos team is very pleased with their start to the year and is committed to execute with excellence against our initiatives in 2019 and to pivot to FFO growth in 2020. We are confident we have the portfolio, partners, team and perspectives necessary to deliver. With that, I'll hand it to the operator to open the line for questions.
Thank And our first question comes from Nick Joseph with Citi. Please proceed.
Thanks. Alban, thanks for SHOP NOI guidance. You mentioned in your remarks that you expect to trend towards the lower end of the range. What are you now expecting for full year 2019 in terms of the number?
So hi Nick. Yes, so we are correct, you are correct. We are guiding towards the lower end. A reminder, the range is flat to down 3%. We were down, call it, 2.5% in the first half.
So I would describe the full year at the lower end as below the midpoint, but still within the range of that original guidance.
So around 2.5% for the full year as well?
Between 1.5% and 3% down, yes.
And then when you think about your comments for 2020 shop performance over the next 5 years, what gives you the confidence to achieve kind of the goals that you've laid out given the challenges you had already this year in terms of results versus what guidance initially assumed?
Yes, great. Thanks for asking. I think it's really important to differentiate between the here and now and the guidance and the results just reported, which clearly are still in the midst of the timing mismatch between supply and demand, there's no question, and very much in line with expectation, again, reaffirming our full year guidance. That is different than a 5 year outlook. And we did, in the prepared remarks, talk about the demand supply equation go forward, specifically in 2020, where we see an improvement in new deliveries of 15% year on year, 2020 versus 2019, and indeed the lowest level we've seen since 2015, which is obviously informed by proprietary data and really no change frankly in the last month from what we told you then and what we see now.
So our optimism remains clearly the powerful upside with operating leverage, accelerating demand and visibility into supply is what gives us the confidence in that 4% to 6% CAGR over that 5 year period. So we remain steadfast on that point.
Thank you.
You bet.
Thank you. And our next question comes from Nick Yulico with Scotiabank. Please proceed.
Thanks. Good morning, everyone. So I know you announced a lot of new R and I developments at the Investor Day, but I think you also talked about over the next 12 months, you would you could be announcing another $600,000,000 plus of projects. And I know it's only a month ago, but do
you have any updated thoughts on that?
Well, we would confirm that, that we have announced the $900,000,000 in 5 specific projects, which are outlined for you. And then there are about 600 more in the near term pipeline that compose the $1,500,000,000 pipeline that we are working on and believe will be commenced in the next 12 months.
Okay. And then just two more questions on SHOP. If we look at the FAD adjustments you give on the CapEx in the SHOP segment, it was up and I think you year over year and I think you also raised your CapEx guidance higher. Can you just explain what's driving that? I mean, how much of that is just routine costs going up versus you spending more money to position the portfolio better relative to some of the new supply competition?
Sure, Nick. Yes, thanks. So we'll spot it. So we did increase on a full year basis our FAD CapEx by about $5,000,000 at the midpoint. That is Ligurit Maurice now incorporated into the forecast.
Of course, that's SHOP asset. When you look in the 2nd quarter, particularly at SHOP on fat CapEx spend year on year, it is higher year on year. I would point to timing very much on that. So our full year outlook hasn't changed in regard to core of the base FAD CapEx. It's really just timing within the year.
Okay. That's helpful. And then just last question is on the I think the number of assets changed in the same store for SHOP. And I know you had some I'm just trying to kind of reconcile the overall SHOP portfolio. I know you transitioned, you said some triple net to ESL and then it looks like you're also you lowered the number of assets in the same store for SHOP.
And then I think you also have some higher amount of assets that are now intended for disposition versus last quarter. So if you could just kind of reconcile that, that would be helpful. Thanks.
Yes, you bet. So and there's a lot going on as you rightly say. But the topic sentence I would make is that the vast majority of our assets are in the same store pool. And there's a helpful table that reconciles what's in and what's out, but over 90% is in the pool. Now within that, there are certainly some changes.
So for example, in the guidance for dispositions, I highlighted an incremental 100,000,000 dollars particularly as a result of shop non core dispose. That's incremental and new to the guidance. That's approximately 10 assets. Those have been taken out of the same store pool in our advanced stages of negotiation. So that's an important change.
And as also noted, transitions within triple net between business model, particularly from triple net to shop also occurred and notably with ESL. So those are all in the midst of that reconciliation and new quarter over quarter.
Okay. And is there any benefit to full year shop same store performance by selling those assets?
Not material.
Okay. Thank you.
Thank you.
Thank you. And our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed.
Thanks for taking the question. So just two quick ones. Just going back to SHOP, so you've narrowed the range towards the bottom. If I look out, I know the 5 year is different from today, but you do have a pretty good handle on supply as you highlighted for the next 3 years. I'm just hoping you can give us some sort of trajectory whether it's, hey, this is the next 3 years and then we're assuming X in year 4 5.
Given you have all the granular data on supply and demand, could you just give us some incremental color on kind of how you see this 5 year progressing in terms of trajectory?
Vikram, hi, this is Debbie. I'm so glad that this is a topic of interest and you were able to really appreciate all the data analytics and the detail that we provided for you at Investor Day. So Bob will answer your question, but
Yes. So there was a bit of incremental news today in that we shared the 15% improvements in supply deliveries next year as our expectation. We showed at the Investor Day 35% over a 2 year horizon. So as you go into 2021, even more improvement on deliveries. And of course, at the same time, you see the increasing demand both on the underlying population and penetration.
And so that together begins to accelerate in 2021, 2022, 2023 and beyond. And so the slope of the curve will follow that in terms of our NOI. I emphasize again, next year, we talk about occupancy inflection in the back half of the year. Of course, we continue to have to work through the deliveries, but it's really an occupancy commentary. But again, I keep coming back to the 5 year confidence and we really remain very confident in that and have the insights to give us that confidence.
Okay. But would it be fair to say that
since you have a pretty good view on the next 3 years, year 4 5, you're just sort of assuming continuation of demand and maybe somewhat of an acceleration in year 4 5 from year 1 3?
Yes, indeed. Indeed. The slow pull accelerates in the latter years of that 5 year yield question.
Okay. And then just on the Duke MOB deal or I just want to clarify, is it an MOB? Is it sort of a mix between R and I and MOB? You did pay a sub-five percent cap rate. And I believe just my talking to brokers, there was a decent amount of interest in this asset.
So can you give us some more color? Was there
a bigger, broader rationale?
Are there other growth opportunities within the asset or just logging to the system?
Yes. Thank you. So it's a 5.5% cap. It's a new asset, long term lease with Duke Health and affiliated physician groups. I think importantly, it is showing this convergence of academic medicine and research and innovation.
We have a nearby research and innovation building that really was built for Duke researchers and Duke Health Faculty, where they're conducting translational science that is used to cure and treat illness. And so I really like the acquisition for many reasons, certainly on its own as a good risk adjusted return, but importantly because it both expands our relationship with Duke and it really shows this convergence that we saw at Penn and that we're seeing here between medicine and the research and innovation business.
Just to clarify, that's 5.5% GAAP, right, not cash?
It is because it has it's 100% leased and it has a 13 year lease with 2.2% annual cash escalators. So that's why we think it's a good risk adjusted returning investment for us.
Okay, great. Thank you.
You're welcome.
Thank you. And our next question comes from Michael Carroll with RBC Capital Markets. Please proceed.
Yes, thanks. Bob, I wanted to see if you could talk a little bit about supply again. And I know in the NIC data that came out a few weeks ago kind of showed that deliveries were fairly consistent in the first half of this year, but it's supposed to spike in the second half before moderating again in 2020. With your work that you guys have been doing in your portfolio, do you see something similar to that? Or do you think that you're going to see a much smaller uptick in the second half of this year?
Yes. This is Chris Cummings, Senior Vice President of Asset Management for Senior Housing. I'll take that one. So as we look at the supply forecast, we're really looking at a combination of data sources, including Nick as well as others. And I think what we're seeing is a consistent pattern in the back half that we're seeing in the front half in terms of deliveries.
Okay. And then I guess, Bob or Chris, if you're looking at the your supplement and the data that you provide about the construction and process pipeline within your portfolio. It does seem like it increased a little bit in the Q2 versus the Q1. I'm assuming you're just grabbing the NIC data there. I mean, I guess with the work that you guys have done, is that increase similar to what you're seeing or is that a little bit different?
Yes. This is Chris again. I'll take that one. So what you're seeing is really a factor of the pull change that we talked about. If you look at the same pull 1st quarter to 2nd quarter, you would have seen a similar decline of 30 to 40 basis points as you saw in the NIC reported data.
Yes. I was referring to the construction in process pipeline. Within your supplements, your supply sheet showed that there is 6.5% of developments are in process right now versus the 1Q 2019 supplement, which showed 5.9%. So within that data set that you provided, it assumed that supply or construction activity increased a little bit.
Yes. And we're referring to the same, Mike. So the phenomena here is that as the pool changes and you take assets out of certain markets, the denominator changes, so the percentage changes.
Okay.
That's it's really that. I would step back and say, though the NICS data, as you know, gets revised, as we look at our data, it really hasn't changed in terms of the outlook on supply, as I mentioned, from where we were 30 days ago, very, very consistent. So nothing new to report on supply from our perspective.
Okay, perfect. And then I guess last question, can you talk a little bit about the flu season? I know it was a little bit longer this year compared to the past several years. I mean, did that impact your results at all?
Not in the Q2. It was a little bit of a storm in a teacup, I'd say, because it started out pretty aggressively. It's a fat tail, as we've described it, But then it went away pretty quickly. So a non event in the quarter.
Okay, great.
Thank you.
Thank you.
Thank you. And our next question comes from John Kim with BMO Capital Markets. Please proceed.
Thank you. Can I ask a couple of questions on guidance? So you maintained your same store NOI guidance, yet offices trending higher, shop trending lower. Why not change the components if you think that's going to be the case? Is that just a policy issue?
And also, are those two items going to essentially offset each other? Or is the total same store NOI trending above or below midpoint?
Yes. Whether it's a policy, it might be a, I'd call it, a framework, a guardrail. Insofar as just quarter to quarter guidance, I don't think should change on the segment level, barring something unique, material. So qualitatively giving you a sense for where we're headed and or changing the range in light of the material changes is our framework for sure from here. And we think that's good for the investors as well.
And as you say, some within segment higher end or lower end, but again, on average and in total, sticking to the range we gave in February.
Okay. And then can I ask what you're expecting as far as shop occupancy for the second half of the year? And then separately, but within guidance still, what is your assumption on the base rate of the Colony loan just given LIBOR has been trending down?
I'll do the first one. So guidance, if you go down the P and L from what we said in February, we are still holding true. And on the occupancy line, that was flat to down 50 basis points year over year, and we are still holding to that number down through the P and L. So as I mentioned, whether it's costs, rate, occupancy, it's really shaping up through the P and L very much in line with the range we gave initially.
Regarding Colony, we're just picking it about 9%.
Great. Thank you.
Thank you.
Thank you. And our next question comes from Chad Vanacore Vanacore with Stifel. Please proceed.
Thank you. Good morning. This is Tao for Chad. My first question is regarding the $9,000,000 borrowing income from Paragon. Could you remind us of that particular transaction and how it was structured?
Yes. We basically had an investment in the equity of Paragon, which is one of our tenants in our UMB Knowledge community and that is a high quality tenant who was recently acquired for $1,000,000,000 to $2,000,000,000 dollars and the valuation on the warrants was obviously at a lower level. And when the transaction closed, we were able to gain the difference between the strike price and the valuation. And so we were very happy to receive those cash proceeds and it really does show the quality of our R and I business once again.
Would you say that's like an equity for rent type of arrangement? And do you have other similar equity investment in your INR portfolio that potentially could add to earnings down the road?
Thank you. Yes, I mean, basically, it's just like an option. And we have maybe a handful of these little things kicking around in the office business and they may or may not come to fruition over time, but it does really point out the good tenancy that we have and the opportunity that we have in the office business.
Okay. That's helpful. So my second question is regarding the triple net senior living assets. So it looks like you sold 6 assets in the second quarter on these book deal assets?
Yes. That is correct. They were Brookdale assets. We have approximately $100,000,000 of Brookdale dispositions in our guidance and that was about $25,000,000 of the $100,000,000
Okay. So we still have maybe like 2 thirds of those that has ceased to be sold?
There are a few more assets remaining in our agreement with them that are being marketed for sale.
Okay. So it looks like the triple net coverage dipped a little bit in the second quarter. Could you tell us what the holiday coverage is like and what is ESL prior to the transition?
As we mentioned at Investor Day, holiday is 1.15 fixed charge coverage. And regarding the triple net coverage, it's as we expected when we reported last quarter.
In your press release, you said that you're not looking to modify the holiday lease. Would you like to attach the timeframe for that? Is this the strategy to kind of wait for the upturn of the market?
We're going to have to move on just so we are courteous to the other callers. But we're in a good spot there and have lots of options, a good portfolio and a good lease. So we're going to have to move on. But thank you for your questions.
And our next question comes from Daniel Bernstein with Capital One. Please proceed.
Hi, good morning. Hi. Just follow-up on some of the lease coverage. Do you expect lease coverage in the triple net seniors housing portfolio to tick back up once you complete asset sales?
Hi, Dan. This is Debbie. I think that what we can say about the triple net portfolio, remember, it's a lagging indicator. It's a trailing 12 month indicator that is reported 1 month in arrears. So as we go through this protracted housing cycle and then when we get in the powerful upside, you should see that coverage again trend down as it has been and then over time trend up again.
But basically it will be behind the way you report your P and L and your SHOP assets, which is immediate. And so that will take I think that cycle is a long dated cycle that will take years really to play out. And it will tick up again over time as the senior housing business benefits from demand and we achieved this powerful upside, which affects both the shop operators as well as the triple net operators.
Okay. Are you looking at that does that your comments just now apply both independent living and assisted living? If you look at some of the NIC data and maybe the data you have on your particular portfolio is a little different. But Independent Living construction seems a little bit more elevated now than assisted living and the triple net portfolio, you
can correct me if I'm wrong, is
a little bit more tilted toward independent living than AL. So do the comments apply both to AL and IL? Or do you have some tilt in those comments towards assisted living?
Yes. With our proprietary data analytics and our experience, you're sophisticated enough to see that within senior housing, those 2 sub segments may have also their own separate timing cycles. But I'm talking now about the whole. And we do look at those individually, but we're talking now about the whole of senior living. And I think the main point is that you may see operating improvement in the assets before you see coverage start to cycle back up.
And that's our expectation.
Okay. Okay. That's all I had. Thank you.
Thank you.
And our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please proceed.
Thanks. Good morning. Good morning. So I just wanted to follow-up on the how are you? I wanted to just follow-up on the cash same store NOI trending a little bit lower.
Bob, I think so you're expecting you are expecting some improvement. I think you were talking about sort of easy comps on a RevPOR basis. Can you just sort of help me understand what's going what else is going on from sort of an occupancy and expense perspective sequentially as we head into the second half of the year that gives you the confidence that we'll kind of that the sort of deterioration that we saw sequentially, year over year deterioration will sort of moderate?
Yes. So me talk about sequential first. Sequentially, if you look at SHOP, senior housing, there's always a seasonal dollar sequential decline, first half to second half, and that's more days, more PTO over time, higher utilities. So seasonally, we expect first half to second half dollars to be lower as it is every year, nothing new to report there. Year over year is really where the discussion is because that takes that out.
And looking at the P and L, 50 basis points range. I mentioned RevPOR strengthening as result of lapping prior year. At the same time, OpEx, 2% to 3% is still a good number for the year basically implying that we're going to see some of that labor wage pressure coming through in the back half of the year, all of which nets out to the lower end of the range for the full year and a pretty consistent performance NOI as the first half. Hopefully, that answers
Yes, that's helpful. And then looking at the triple net portfolio overall, triple net revenue declining sequentially, I assume the BKD sales may have been a portion. I have to look at the timing there. And then there was some transitions you talked about in the quarter. I guess the ESL, how much of the $10,000,000 bucket of restructurings that you've sort of laid out was used up in the quarter, if any?
And then, is it just those BKD sales and the transitions that were driving that decline in triple net revenue?
Yes. So let me talk about $10,000,000 for the year. Dollars 3,000,000 crystallized year to date, principally 2nd quarter. And phasing of the balance of the $10,000,000 call it $3,500,000 each quarter Q2, Q3. So that's how the $10,000,000 plays out and certainly, the transition to ESL is a part of that in the second quarter when that was consummated.
In terms of dollars sequentially, you're pointing to the right items. If it's kind total revenue. Those are definitely drivers.
No other one times to point to then? No. Okay. And then lastly, can I give you one quick one for you, Deb, on investment? I know you guys are convicted on the same store growth in the 5 year outlook, which is obviously pretty impressive numbers and would be, I think, the best in your portfolio over that period.
So should we expect, as you're sort of focusing on investment, that you would ramp your investment in U. S. Shop opportunities in the near term?
Well, again, one of the benefits of our enterprise and we have invested about $3,000,000,000 a year since 2010 or 2,009. One of the benefits of our enterprise is that it's broad, it's diverse. We have complained different parts of the capital stack. And so we are constantly evaluating opportunities across our verticals and with up and down the capital stack to make good risk adjusted returns. And so I think you'll see that across the board as you have this quarter with development in R and I, with the Le Groutte Maurice investment and with our interesting trophy office assets.
So you'll see us invest across the board.
Okay.
Thank you.
That's a great I mean, we have a great business to be able to do that. Thank you. Thank you. Thank you.
And our next question comes from Derek Johnson with Deutsche Bank. Please proceed.
Hi, good morning everybody. Thank you. Actually, all my questions were answered. I thought I queued out. My apologies.
But thank you and have a great day.
Thank you. Thank you for your courtesy.
Thank you. And our next question comes from Michael Mueller with JPMorgan. Please proceed.
Yes. Hi. Just a quick numbers question. Was the $0.02 of warrant income in prior FFO guidance? And is anything similar baked into the implied 2H guidance?
No. This is Bob. No, that was not baked into guidance. Obviously, now it is at $0.02 And we don't have anything new like the warrants in our guidance.
Got it. That was it. Thank you.
All right. Thanks.
Thank you. And we have a follow-up from Nick Joseph with Citi. Please proceed.
Yes. It's Michael Bilerman. Just two questions. The first, Bob, if you can just maybe unpack all the positives and negatives on a per share basis to the guidance change. And you clearly had the investments that you made for the Colony loan, the Group Maurice, the Duke asset, the earlier timing on the equity to fund that.
So some dilution as that equity stays on your balance sheet. You talked about weaker core in the shop, better office. You just mentioned the $0.02 addition on the Paragon, lower cap rate on the sales. If you can just sort of tally up, here are the scents that are positive and here are the scents that are negative that equaled the positive 3, that would be helpful. And then I have a follow-up after that.
Good laundry list, Michael, but we'll just we'll streamline it for everyone.
Yes. I'll try to simplify it down. So Colony, clearly not in the original guidance. Now we talked about that being $0.05 for a full year leverage neutral. So this is half a year, call it $0.025 good guy.
Paragon, not in, now in, dollars 0.02 good guy. The partial offsets include the equity drag because we funded early on LGM and property insurance premiums, which I noted in the prepared remarks. We have renewal in this very tight market and each of those are about a penny that gets to $0.03 at the midpoint.
And then you're saying the shop and the office negate each other from a per share perspective? Yes. Okay.
Yes. The company same store property is consistent.
Right. And then just trying to if we go back to SHOP and you had your Investor Day mid June, I guess at what point did the shop start to underperform your full year expectations? Was it a 2Q issue? Or is it as you reforecast post Investor Day that the second half, either from a rate occupancy expense perspective, was different from what you forecasted in February. It just feels as though things have moved faster to the negative in a short period of time from a forecasting perspective, which then calls into question the confidence in and I understand the supply is coming down in 2020 2021, but if you can't get the numbers accurate in the short period of time, what sort of confidence can we and investors have about the go forward?
Yes. Well, Michael, if you were sitting in and around the table here over the last 6 months, there's really no news in terms of SHOP and our expectation. And so we haven't seen a change. Everything right through the P and L is very much in line with guidance in February. And there's a range, of course, and we're within that range.
So there's absolutely nothing that's changed in our view since Investor Day. There's nothing that's changed for our outlook. If there were, we would have said something when we stood up in front of you a month ago. So our conviction remains the same.
But you are trending towards the low end of the range you provided in February and sort of showcased late last year, right? I mean there is a change.
To spend higher on others and the most important point is that as a company everything is in line kind of with our company range and within the ranges by segment. So very consistent with our February outlook. And in the shop case, as Bob says, really even on the line items and that should and does continue to give us confidence not only in our full year forecast, but also in the multi year framework that we laid out at Investor Day. So as I said, I think it's really a great time to be at Ventas. It's great time to invest in Ventas.
We have a lot of opportunity. We're excited and we are in line with what we expected from 2019 or even better, $0.03 at the midpoint. So we're feeling good about that and I hope everyone
I get all that. Right. Yes, no, and I get that. And Ventas was an organization and you have all the levers to be able to pull the growth. And so I'm just focusing on the shop piece because it was a big part of Investor Day and being at the lower end of the range, I don't know, it seems like a change, at least on that piece.
And I'm just trying to understand if it was something particular in the Q2 that would have caused it or something that you saw in the back half of the year that would allow you to trend lower at least on the shop thing?
All of
the other things that you guys are doing from an enterprise perspective, you're not just a shop company. I get that, investors get that. But I'm just trying to understand the change, when it happened and why it happened.
Yes. There is no change in our view. Again, we were down year over year in the Q1, call 2.2%, 2.9% in the 2nd quarter. The profile of the P and L very similar and everything within the original expectations. So again, I can only say it's very much as we expected.
All right. So I think Michael that you are our last but not least questioner and I really want to thank everyone for their time and interest in Ventas. I hope everybody has a great rest of the summer and we will look forward to seeing you soon. Thank you.
Ladies and gentlemen, thank you for your