Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Ventas Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.
Juan Sinabria. Sir, you may begin.
Thanks, Lauren. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2019. As we start, let me express that all projections and predictions and certain other forward statements to be made during this conference call may be considered forward looking statements within the meaning of the federal securities law. The company cautions that these forward looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ from the company's expectations whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward looking statements to reflect any changes in expectations.
Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10 ks for the year ended December 31, 2018, and the company's other SEC filings. Please note that the quantitative reconciliation between each non GAAP financial measure referenced on this conference call 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 at www.ventasreit.com. I will now turn the call over to Deborah A. Cafaro Chairman and CEO of the company.
Thanks, Juan, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas Q1 2019 earnings call. I'm happy to be joined on today's call by my outstanding Ventas colleagues. We are delighted with our strong start to the year. During today's call, I'd like to describe some specific areas of excellence, performance and focus for the company, comment on market trends and discuss our pivot to growth.
Let me begin with our excellent company wide performance. I'm very pleased that we delivered $0.99 of normalized FFO for the quarter. Our property portfolio delivered solid same store growth. Our cash flow was strong and our balance sheet was even stronger from terrific capital markets activities. We are also today reaffirming our guidance issued in February.
Our skilled and tenured team continues to be positive, cohesive and actively focused on delivering 2019 performance and driving our pivot to growth. I was struck again this quarter by the resilience of our large diversified business that's expected to generate approximately $2,000,000,000 in net operating income during the year the indisputable demographic demand for our businesses, which is in the very preliminary stages of asserting itself the broad based investment opportunities we have across our verticals our best in class financial condition our experience in proactive and effective asset management our relationships with outstanding universities, partners and leading care providers and the bright future ahead for Ventas. It is easy to recognize these immense strengths, while also acknowledging that we continue to feel the effects in our senior housing business of elevated openings of new communities as the industry works its way through the timing mismatch between deliveries and demand. Turning to some proof points for my optimism and confidence. Our office business, which should produce over $550,000,000 in annual NOI and is the focus of our investment activity turned in an excellent quarter.
It delivered 3.8% same store cash growth, hit multiple milestones, received numerous prestigious recognitions and proved out its value and attractiveness. Let me illustrate with a few examples. First, our completed developments are succeeding. Our Trophy Downtown San Francisco MOB is open and 83% leased, principally to AA rated Sutter Health. And our new 3,175 Market Street asset at Penn's campus is already 92% leased within months of its opening.
3,175 recently attracted a publicly traded global biotechnology company who wants to relocate so it can collaborate with UPenn's genetic researchers. 2nd, our in progress previously announced developments are hitting their stride as we broke ground on dollars 1,000,000 development at Arizona State's Biomedical Campus in Phoenix, 0.225, our Brown related research and innovation project, is expected to open in the second half of twenty nineteen and we signed a lease with Ascension to occupy 100% of our medical office building in Panama City, Florida, which we have begun to redevelop for them following last year's hurricane. 3rd, we acquired a high quality research and innovation asset in April for $128,000,000 This desirable fee simple lab building is near MIT and Harvard in the Cambridge market. We expect to see significant rent growth in this asset, which also offers us a window on the Cambridge life science cluster market, one of the most desirable real estate markets in the U. S.
We also effectuated the seamless re tenanting of 250,000 square feet of research space to Yale University. Yale immediately replaced a corporate tenant in our world class research building adjacent to Yale's campus for a 25 year term, so it could utilize the space for its STEM initiative and collaborate with the Yale School of Medicine. Yale has now become our 2nd largest R and I tenant. Finally, we continue to make tangible progress on the balance of our $1,500,000,000 research and innovation development pipeline and expect to reach significant additional milestones for a large portion of these identified projects through the balance of this year. We are also confident that substantially all of our $1,500,000,000 pipeline will be commenced within the next 15 months.
We're also making considerable advances in our triple net lease business, which grew same store cash results over 2% in the Q1. Expected to generate over $750,000,000 in NOI, this diversified business continues to grow, driven by annual lease escalators, improving performance by certain tenants and our continued investment in our properties, partially offset by modest anticipated lease modifications or asset transitions. A few key accomplishments and themes to note in the triple net portfolio. We and Brookfield are successfully collaborating and implementing the agreements we reached in 2018. First, we've committed $36,000,000 in capital for approved projects to enhance the quality and competitiveness of our Brookdale lease communities at a 7% return.
And second, we are jointly marketing and expect to sell over 20 assets in the portfolio for proceeds exceeding $120,000,000 We also executed a very attractive 5 year lease extension with Genesis Healthcare recently through 2026. The Genesis extension is on the same rental and escalation terms as the existing lease. It also retained the Genesis corporate guarantee, a sizable security deposit and a guarantee of the rent by a creditworthy third party. This favorable transaction demonstrates our proactive asset management approach and capabilities. We are applying this experience and capabilities to other portions of our triple net portfolio.
We are on track to complete a series of transactions in the portfolio that in the aggregate should offset our net triple net leased NOI by approximately $10,000,000 this year. Regarding our lease 26 assets with Holiday Retirement, operations appear to be stabilizing and slightly improving. It expects its pro form a fixed charge coverage to be above 1.15 times at year end, inclusive of the guarantor. The management team appears to be energized and have a renewed focus on the company and operations. Turning to our relationships with leading care providers.
I'd like to highlight that Ardent had an outstanding 4th quarter in its continuing operations and we are delighted with its performance. We are also encouraged that Medicare has proposed a nearly 4% effective rate increase for hospitals in fiscal year 2020, which commences later this year. This increase is very positive for the sector. Kindred is also performing well and its results trended positively through year end as its operational strategies have taken hold. In the long term acute care space, Kindred continues to be a market leader who is able to attract and care for medically complex compliant patients.
The Medicare rate proposal for LTACH that was recently released includes a favorable 2.3% rate increase for compliant patients. Atria continues to be a best in class senior care provider. It is nice to see that other developers and institutional owners agree as Atria is experiencing significantly increasing demand for its services and capabilities, including Atria's development partnership with Related to operate high end senior housing in major markets. Our 1 third ownership in Atria enables us to benefit from Atria's success and maturation, which we embrace because it builds value and sustainability for the company. We hope to duplicate that success with middle market operator, ESL, over time.
Moving to our investment activity. We continue to see quality investment opportunities in the market across our asset classes. I believe strongly in our ability to reignite external investment volume on top of our robust research and innovation developments that will drive future growth at Ventas. When we look at the investment environment, we segment opportunities roughly into 3 categories. First, low cap rate private pay and high quality assets like our Trophy Battery Park Senior Living community in New York City, which is performing well and our recently acquired research asset in Cambridge.
The second category consists of higher yielding or opportunistic investments that arise episodically or investments where Ventas has superior understanding of the assets or a unique relationship or market position. And 3rd, classic medical office and senior housing investments where we can use our enhanced knowledge of the market, data, relationships and other competitive advantages to underwrite and integrate attractive portfolios. Executing on all three avenues over the years has produced significant accretion and value creation and we intend to continue this approach. Next, a word on senior housing trends. Through the Q1, we are encouraged by the recently reported continued improvement in senior living starts.
In the top 99 markets, starts were at their lowest level since the Q3 of 2012 and down 55% from the peak start level achieved in mid-twenty 15. Even more notably, we are seeing early but unmistakable signs of demographic demand manifesting in the sector. The year over year growth in occupied units in the top 99 markets at 2.7% is the highest since Q3 2014 and close to its highest point ever. In the primary markets, annual absorption growth in the Q1 was 3%, the highest on record. Construction as a percentage of inventory remains elevated, but is improving gradually.
As a result of these positive trends and the forward growth rate in our customer demographic, the supply demand equation will flip in our favor in the future after we work our way through absorption of the current excess supply, creating a powerful cyclical upside. The coming improvement in the senior housing cycle represents a key underpinning to our company's pivot to growth. The other pillars are organic portfolio growth in the rest of our business, the NOI expected from our research and innovation development pipeline and accretive external acquisitions. The whole team at Ventas brings its optimism, strength and skill to the table as we optimize the current environment and focus on capturing the significant opportunities ahead. In closing, the current economic expansion is on pace to be the longest ever shortly.
As it inevitably winds down, Ventas is well positioned. With our growth prospects, resilient diversified business model, need based assets, solid dividend yield, outstanding balance sheet and demographic demand story, Ventas is a great place to invest. With that, I'm happy to turn the call over to our CFO, Bob Probst.
Thank you, Debbie. I'm happy to report a fast start to the year with solid property level growth from our high quality portfolio of seniors housing, office and healthcare real estate. Our total property portfolio delivered same store cash NOI growth of 1.1% in the 1st quarter, with office and triple net leading the way and all of our segments performing in line with our expectations. Let me detail our Q1 performance and 2019 guidance, starting with SHOP. Our SHOP business saw cash same store NOI decrease 2.2% versus prior year, within the range of full year expectations.
Q1 same store occupancy was solid at 86.6% as a result of share gains and expansion in demand. The 1st quarter occupancy gap versus prior year represented a modest 20 basis point decline and compares favorably to a year over year occupancy gap that averaged 80 basis points for the full year 2018. Meanwhile, Q1 RevPOR grew 30 basis points. January 2019 in place rent and care increases to existing tenants were healthy, partially offset by releasing spreads, which continued to be impacted by price competition. However, Rev 4 in the balance of the year may benefit from lapping heightened discounting in the second half of twenty eighteen.
Operating expenses grew a modest 1.2%. Our leading operators did a terrific job adeptly managing staffing levels and driving efficiencies. Operating expenses, including management fees, were also favorable given aligned incentives for growth with our operators. At a market level, we continue to see NOI increases in our traditional strongholds, including Los Angeles and Canada. This strength was mitigated by lower NOI in markets affected by new competition, most notably Atlanta, Chicago and Detroit.
We note that although this year's flu was more modest than last year, this season's activity has extended longer and later. We are monitoring the potential impact in the key 2nd quarter selling season. We're maintaining our full year same store shop NOI guidance of flat to minus 3%. Big picture, though we are in the midst of elevated new openings, we are keeping our eyes on the horizon, Improving construction starts, accelerating demand and operating leverage underscore our conviction of the powerful upside in a senior housing recovery. Moving on to our highly valuable office segment, which includes our university based research and innovation and medical office businesses and now represents 27% of our NOI.
We note our office contribution to total NOI has expanded by 12 percentage points over the past 5 years. Our office segment delivered terrific same store cash NOI growth of 3.8% in the 1st quarter. The R and I business took the lead, increasing Q1 same store cash NOI by an exciting 13%. Q1 benefited from a lease termination fee of $1,900,000 from Alexion, whose space was backfilled in full by Yale with a 25 year term and enhanced credit terms and credit quality. Adjusted for this item, R and I increased 6% driven by occupancy gains of 70 basis points on attractive lease up at our Duke and Wake Forest assets, together with revenue per occupied square foot increasing 5.1%.
We affirm our full year guidance of 3% to 4% for R and I same store NOI and expect some same store quarter to quarter lumpiness driven by timing of lease up activity. Turning to our medical office business. MOB same store NOI grew 1.1% in the Q1. Growth was 1.5% for the quarter, right at the midpoint of our MOB guidance range after adjusting for a prior year Q1 lease modification benefit. Our team did an excellent job managing occupancy with tenant retention exceeding 87% in the Q1.
Pete Bulgarelli, now 1 year at the helm leading our office business, is making tangible moves to positively affect the MOB performance arc, Enhancing our leasing capabilities and processes, a sharp focus on customer satisfaction and early wins in redevelopment are a few examples. On a combined basis, we continue to expect our office portfolio of R and I and MOB assets to increase 2019 same store cash NOI in the range of 1.5% to 2.5%. On to our triple net segment, where same store cash NOI increased by 2.2% for the Q1 driven by rent escalations. Trailing 12 month EBITDARM cash flow coverage for our overall stabilized triple net lease portfolio for the Q4 of 2018, the latest available information, remained stable with prior quarter at 1.5x. Trailing 12 month coverage in our triple net same store seniors housing portfolio was 1.2x in the current reporting period.
As rent coverage is a lagging measure, we expect to see future coverage round down to 1.1x with current industry conditions. In our post acute portfolio, drilling 12 month cash flow coverage was stable at 1.4x. Finally, Ardent delivered terrific results in 2018, driving rent coverage to expand to a robust 3x. We continue to estimate that our triple net portfolio will grow 2019 same store cash NOI in the range of 0.5% to 1.5%. Consistent with our previous guidance, rent escalators are expected to be partially offset by $10,000,000 in NOI reductions from lease modifications with certain smaller senior housing operators.
Now turning to our overall company financial results and our 2019 guidance. Normalized FFO per share in the Q1 was $0.99 was achieved together with an even stronger balance sheet. We again demonstrated capital markets excellence in the quarter. We issued $700,000,000 in bonds with an average 16 year duration at an attractive 4.1%, thereby extending our maturity profile and reducing our floating rate debt exposure. Our new commercial paper program is off to a great start and is proving to be a very cost effective way to finance our short term working capital needs.
And $100,000,000 of equity issued under our ATM program efficiently funded our Cambridge Life Science acquisition. As a result of these actions, net debt to adjusted EBITDA improved 10 basis points sequentially to a robust 5.5x in Q1, and our financial strength and flexibility is in top shape. Also of note in the quarter was the adoption of the new accounting leasing standard. Its effects include establishing an operating lease asset and liability exceeding 200,000,000 and expenses with no effect on NOI and $0.02 per share in incremental leasing costs for the full year reflected in SG and A expenses and incorporated in our guidance. That's a good segue to our 2019 guidance for the company.
We are pleased to reaffirm both our property cash NOI same store guidance as well as our expected 2019 normalized FFO per share of $3.75 to $3.85 We expect to receive at the midpoint of the year $500,000,000 in asset dispositions and receipt of loan repayments used to fund $500,000,000 of redevelopments developments principally to focus behind the R and I pipeline. This capital recycling is dilutive in 2019 but delivers attractive future growth and value creation. At our guidance midpoint, implied FFO per share over the balance of the year is $0.94 per quarter on average. The expected $0.05 difference versus our $0.99 in the first quarter is simply described by $0.01 of non recurring fees in Q1, dollars 0.02 of high yielding dispositions used to fund R and I development, and the balance is typical shop seasonality. This is consistent with previous guidance.
Finally, as is customary, guidance does not include unidentified acquisitions and also assumes approximately $362,000,000 weighted average fully diluted shares. To close, the Ventas team is very pleased with our start to the year and is committed to execute with excellence against our strategic initiatives in 2019. We also hope to see you all at our Investor Day on June 17 18 in Philadelphia, where we will bring to life the quality of our assets, our operators and partners and our Ventas team. With that, I'll hand it to the operator to open the line for questions.
Thank you. And our first question comes from Nick Joseph with Citi. Your line is open.
Thanks. Debbie, you discussed the 3 buckets of deals. What's the right long term balance between low cap rate, opportunistic and more traditional MOB senior housing assets?
Well, I do think you stated properly, which is there's a balance and that balance in any given market may change. I think that basically between your first and third buckets, which is the low cap rate and then the attractive portfolios of MOB and senior housing, that would be anywhere from, call it, 50% to 75%. And then the opportunistic would be, call it, a quarter of it.
Thanks. And then if you look at the current acquisition pipeline, how does it break down between those three buckets and where are the best risk adjusted returns today?
Again, it varies in different markets. Right now, our number one capital allocation priority is really the research and innovation pipeline and that's clearly at the top of the list. And then, I would say our pipeline breaks down along generally along the lines I described. Thanks. Thank you.
Thank you. And our next question comes from Nick Yulico with Scotiabank. Your line is open.
Thanks. Good morning, everyone. Good
morning.
Good morning. I was hoping to hear a little bit more about the Cambridge deal. This is more traditional lab space than you've previously owned. Is this a change in strategy where you're looking to focus more on traditional lab space within your R and I segment?
It was a good opportunity for a quality asset in a great market with potential rent growth at a size where it can give us a nice window on that market. We do view it as adjacent or related to our existing university strategy given the type of tenants who are collaborating with MIT and Harvard.
Okay. And then in terms of, I guess larger portfolio deals you might be looking at, how does that opportunity set today? And you talked a lot about senior housing at some point flipping in your favor in the future. And so I guess I'm wondering does that mean that now the attention will focus even more on trying to get senior housing acquisition opportunities?
Our pipeline is typically across all the asset classes. And obviously, we do see the upside in senior housing, and certainly would invest in that sector. Our priorities are as described.
Okay. And then just lastly, Bob, I want to go back to the triple net lease coverage in senior housing. I think you said that you gave a preview and that you expect it to move from 1.2 to 1.1 since it's been it's a bit of a lagging metric that we see. And I guess what I'm wondering then is, you do have the $10,000,000 of lease modifications in guidance, But then when we look at the portfolio and we look at the bucket that has coverage of below 1.1, it's about 13% of the company's NOI. And so I guess I'm just wondering how much of the lease modifications and guidance address that pool of assets where the coverage is lower?
And then at what point you talked about holiday. It sounds like things are improving there. But I mean, should we not be assuming that there's a lease modification needed at Holiday at some point? Thanks.
Well, there is a lot in there. I would just say again because the lease coverage is a lagging indicator, we expect a rounding down at some point as the cycle bottoms. And the primary driver of it is really Brookdale. And the $10,000,000 obviously would improve it, but it's really that's a rounding error in the whole calculation. It's so small.
Thank
you. And our next question comes from Vikram Malhotra with Morgan Stanley. Your line is now open.
Good morning. Thanks for taking the questions.
Good morning.
I wanted to just get a sense of sort of how you're viewing the RIDEA trajectory from here. I noticed sort of on a same store basis, occupancy was probably at a low point where we've seen recent trends, but the expense growth was low as well. Can you kind of talk about how you see the expense trajectory trending through the year and how much of that may have been an occupant a low occupancy function?
Sure. I'll take that one. Good morning. So you're right, we had a great quarter in terms of OpEx growth, a little over 1%. Our guidance for the year, you'll recall, was 2% to 3%, so particularly good in the Q1.
A few drivers in the quarter, continue to flex the volume of labor in light of occupancy, so that lever continues. Indirect costs manage very, very well is the 2nd bucket I would highlight. For example, utilities where new procurement contracts have been signed up are benefiting that line. And then just alignment with our operators in terms of profit growth. Those are the 3 buckets I'd highlight.
2% to 3% still feels like the right number for the year. Underlying wage pressure trends haven't changed, for example, but it certainly was a good quarter.
Okay, great. And then just a bigger picture, I mean, you've talked a lot about the research and innovation, the MOB, the office segment as a whole. There have been several portfolios that have recently traded, probably a few more in the marketplace. Just sort of wondering how do you look at those portfolios relative to sort of the development opportunity, which you've outlined very nicely? Kind of what caused you to maybe stay away?
Or was it just pricing got away from you?
This is John Cobb. And I think you should assume that we look at all those deals. We evaluate every single one, both on the medical office side and the senior housing side. And we're exploring both the R and I developments, but also looking at acquisitions, as you saw this quarter.
Okay, great. And then just last one, if I can clarify the transaction, expenses went up. Is that all Cambridge related for the
year? They went down.
Well, for the outlook is I think your point. And there's some transition costs embedded in that that have gone up in terms of addressing some of these triple net smaller operators. So that's in the outlook for the year.
Got it. Okay. Okay, great. Thank you.
Our next question comes from John Kim with BMO Capital Markets. Your line is open.
Thank you. On the investment buckets, the opportunistic high yielding buckets, is it possible to give some characteristics of what this may entail, whether it's public versus private, which property type or what geography they may be in?
Matt, there's a little bit of feedback on the line.
Is that better?
Could you identify yourself again and ask the question again?
Sure. It's John Kim from BMO. I wanted to know on the investment buckets, if you could provide some characteristics of what the opportunistic higher yielding investments may be, whether it's public or private, what private type they may be or what geography?
Good morning, John. Good to hear from you. I mean, opportunistic by definition are things that pop up that have a variety of characteristics that are not what I would call regular way activities. They can be across the board public or private. For example, public is when your multiple may have a huge advantage over someone else.
Typically, they're more often private opportunities where we may get a call on something where we have a relationship or we may have particular knowledge about assets that enables us to move quickly. I would say even our acquisition of our research and innovation portfolio itself, I would call opportunistic in a sense that it was an attractive asset. We had worked on multiple times. And at some point, John Gray called and said, can you do this in 30 days? And we said absolutely.
And we were off to the races. So that's one good example. Another one was when we helped Ardent buy a very attractive portfolio and enabled them to double in size with the loan that we made to them that was well structured and higher yielding and was repaid on time and early actually. And so those are good examples, I would say, of this opportunistic category. I hope that gives you some color and texture on what I mean by that.
Sure. What about geography as far as domestic versus international or core versus non core markets?
Well, international has not typically been in what I would classify as that category. I mean, something could be. But typically, as you know, these international opportunities in healthcare are at very low cap rates, particularly when tax affected. And so I'd be less likely to put it in that category, but of course there could be something from time to time that's in that category. Okay.
On the triple net coverage and the $10,000,000 impact on lease modifications, which was unchanged during the quarter. Is there a likelihood that this increases just given the coverage is coming down? And also can you remind us if that's already reflected in your same store results?
I'll cover the second question, which is there the $10,000,000 is really the balance of the year, John,
is the
way to think about it. And we're comfortable that, that covers these smaller regional operators we talked about both last time and this time for the full ten.
I guess one last one for me. Is there an update on the Ardens IPO?
That's a subject that we've agreed between us that Ardent will address on behalf of both of us.
Okay, great. Thank you.
Thank you.
Thank you. Today. Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.
Yes, thank you. Debbie, I wanted to touch on your comments that you had in the prepared remarks saying that you're seeing early signs, some of the demographic trends kind of starting to impact the senior living space. Can you highlight what you're actually seeing? Is that just looking at the population trends? Or are you actually seeing some stuff on the property levels that's encouraging you?
Well, I think the absorption or demand is really the key green shoot, I would call it, that we're seeing at record levels in the top 31 markets. And again, we're seeing the supply over less than half of what it was at the peak. These do not, as we know, translate into financial results in the current periods, but will over time translate into the powerful cyclical upside.
Okay. And then just real quick, Bob, I just wanted to touch on the $10,000,000 lease amendments. I know there's been several questions already about it. But I just wanted to confirm, have you done any of those adjustments in 1Q? I guess when's the timing of that $10,000,000 adjustment?
Is that in the full $10,000,000 is that just the 2019 impact or is that the run rate going forward?
That's the 2019 impact, Mike. The $10,000,000 really is the balance of the year. So I think that it's not reflected in the Q1 but affected in the balance of the year. And we have line of sight to basically execute on those by mid year. So we should see those impacts coming through.
Okay, great. Thank you.
Thank you. Thank you.
The next question comes from Joshua Dennerlein with Bank of America. Your line is open.
Hey, good morning guys.
Hi, guys. Hi, guys.
The term fee in office, the $1,900,000 if you back that out of the office same store pool, what would have been same store growth there? And then I guess same for the Genasix cash payment and what that would have done to the net lease?
So let me start just reconfirming those are both great deals. Whether it be Genesis or the Alexion and Yale transaction, as Debbie highlighted, really strong credits, really great transactions, which we're really proud of and cash in the bank at the same time. So to answer the question specifically, office impact is 150 basis points to the same store in the quarter. Triple net is 90 basis point impact for the quarter. Net net net when all is said and done for the full year, it's call it 10 basis point impact on same store.
Okay. All right. Thank you.
And then I saw that you guys it looks like you added a new line item on the income statement under property level operating expenses, called triple net leased. Could you I guess before the triple net lease rental income, it looks like it was a net number. Is this something new going forward or what was your change?
Yes. So I mentioned that we adopted the leasing standard in the quarter. I have a number of effects. One of this, we gross up effectively in triple net where we're reimbursing both revenues and expenses, no NOI impact, things like taxes. So that's the geography change you're seeing in the P and L.
Okay, got it. Thank you. Appreciate that.
The next question comes from Daniel Bernstein with Capital One. Your line is open.
Hi, good morning.
Hey, Dan.
Hi. I just wanted to go back to the lease expenses on seniors housing, the drop in that. Is it how much of that is ESL kind of maybe realigning the expenses from former Elm Croft assets or is that more broad in RIDEA across each of your Sunrise operators as well?
Yes. I think you're referring to operating expenses, if I'm right, Dan. Is that correct? Yes. So yes, again, you're right to say favorable, a modest, slightly over 1% growth rate in OpEx.
We think 2% to 3% for the year. So some things that happened in the quarter, as I mentioned, we continue to have some runway on flexing labor volume and at the same time have done a great job managing indirect costs. So that's what's really driving the quarter. But again, with wage inflation, we expect to see more like 2% to 3% for the year.
Okay. So it's broad and not just ESL?
Yes. It's broad and somatic, yes.
Okay. And then the other question I had is on the MOB assets within office. The NOI growth there is about 1% and the industry is probably doing 2% or 3%. You alluded to some initiatives that you've taken in there to maybe improve that. So I just wanted to rehash that.
And where are those initiatives? Kind of what do you think the upside is within that MOB part of your portfolio?
Sure. This is Pete Bulgarelli. Great question. Glad you asked it. I was hoping for this question.
I was hoping for it.
Glad to ask it.
Yes, thanks. One clarification we should make is that if we weren't lapping an event in the Q1 of 'eighteen, it would have been 1.5% growth. So it would be right in the midpoint between our guidance. But having said that, look, we think that happy tenants are awfully important. They increased our renewal rates, which we're very proud of at 87%.
And they also are great for word-of-mouth and leasing. So in the last year, we've been able to cut our response times, just as an example, to work orders by 50% between Q1 of 'eighteen to Q1 of 'nineteen, which is really enhancing our tenant satisfaction. We've also put a large focus on improving common areas as well as just She comes from Colliers, led their healthcare practice across the country and she starts May 1. So we're very excited to have all three of those coming together to drive better results.
Okay. So it sounds like maybe once you get past some of that lapping of last year, maybe you're back to like 1.5% kind of 2% NOI growth for the second half
of this year?
Yes. Okay. And we're striving
right. That's
good. That's all.
He's back. Hi, Rich. Hi.
How are you doing? Good. So when I was listening to your comments, Debbie, at beginning, you said the focus of your investment activity is in the office sector. And my first thought was that was surprised to secure that, not that you haven't said it in the past, but you guys usually zig when others are zagging. But then I kind of thought about it more and I was thinking, maybe perhaps higher yielding opportunistic, which just requires more work to get done and it takes longer to cross the finish line.
Is that kind of what you're thinking that when you think about that more opportunistic high yielding bucket, you just have to be a lot more careful about approaching them and hence the probability of completion is lower than the other 2?
So I would say that the office is a focus of investment activity because it is performing so well and we have such great advantages and momentum that we're trying to take advantage of especially in the R and I development pipeline. So I think I want to clarify that. In terms of the opportunistic, those can be more complex and take longer, but they can also be, as I said, things that pop up that we can get done really quickly because of our understanding of the market or the asset. So that can go either way.
Okay.
But the important part again is to have a big pipeline, have a diverse pipeline, have good relationships and good understanding of the market, so we can act across the board.
Okay. And then just a follow-up perhaps on the hospital side, I realize that you'll let Arden speak for you on their IPO, but I'm just curious if you are seeing things pop up a little bit more on the acute care hospital segment of the world with a split Congress and some consideration given to the fact that maybe we're going to be with ACA for a period of time despite what the President says?
We continue to be think that the category of health systems and hospitals that we've invested in with great management teams, great market share is an area where we would certainly be willing to commit capital. And Arden has proven to be an excellent incredible investment for us and we would do more. But we will continue to be selective in that market. I do believe that we will have the benefits of the Affordable Care Act for a while. I mentioned the 4% effective increase, almost 4% that is being proposed for later in the year.
And I also believe that we may see additional Medicaid expansion in certain states, which would also be favorable. So those are some good trends I would point to and we would continue to invest behind that if we had appropriate opportunities to do so.
All right, great. Thanks very much.
Thank you.
Our next question comes from Tayo Okusanya with Jefferies. Your line is open.
Yes. Good morning, everyone. Congrats on the quarter.
Hi. Thank you. It was a good one.
Yes, it was. First question, the commentary just around the opportunistic bucket of kind of transactions or investments you could do, I mean, I get that. And again, you guys have been pretty good about doing that. I think in the past, I used to kind of call it the rabbit out of the hat that you would pull. But the thing about that is, while I think it's great near term, if it's not sustained on a longer term basis, you may have these kind of occasional dips in earnings growth.
So how do you kind of manage those kind of two things?
Well, thank you. I think, again, we've done a good job over time in allocating capital to the 3 different categories that I described. The opportunistic one is something that could be, it could be a higher yielding asset as which can be lumpier as you pointed out or it could be something like the Life Science and Research and Innovation acquisition that I mentioned that really has created a whole new business line for us and has been sustainable and actually has driven and will continue to drive a significant amount of growth. So that category of assets is broader than simply a high yielding category.
That's helpful. And then could you also talk about the Genesis transaction? Again, it seems like a pretty unique structure here. You see some of your peers either trying to get rid of their Genesis exposure. You guys have actually extended it.
You got a cash payment. You got a corporate guarantee. You got a guarantee of a rent by a third party. Again, I'm just kind of curious that what's the when you sit down with Genesis to kind of come up with these kind of creative type solutions, I'm just again, it's impressive to me that you can kind of do this while again you have a lot of other people who are kind of doing the exact opposite thing. And what are you seeing here that you think others may not be seeing?
Well, thank you for saying that. It is a good example of our proactive asset management capabilities and our ability really optimize situations on behalf of our shareholders. And I agree, while Genesis is a small tenant, about $20,000,000 a year, the fact that we extended the lease with a corporate guarantee out to 2026 is impressive and is a real win for the company, including a cash payment and the guarantees and all the other things that we talked about. And this is the kind of management expertise and the benefits of our excellent team that we bring to bear to try to create good outcomes for our shareholders across the board and we've done it time and time again over the years.
But who is this 3rd party that's kind of being given a guarantee on their behalf? Is that
kind of current thing?
I'm just like really surprised to hear that.
Well, if you think about the corporate history of Genesis, you might be able to figure it out. But I'm just going to leave it where it stands now with a creditworthy 3rd party guarantor.
Got you. All right. Well done. Thanks, Tayo.
The next question comes from Todd Stender with Wells Fargo. Your line is open.
Hi, thanks. Good morning.
Hi. Taking a look
at your the new Cambridge acquisition, when you look at the low cap rate and high cost per square foot, it suggests you're looking for some pretty good upside in rents and you noted that with the double digit rent increases for the last couple of years. Can you provide more details on the current tenant base, maybe occupancy and maybe what the lease role looks like? Thank you.
Sure. This is John Cobb. The 10/30 Mass Steel that we announced is what we think is a highly attractive asset in Cambridge. It is a high price per foot, but you have really great current rental rates, which is in the low 70s. You're seeing a market rents above that.
The current it is 100% occupied with a really good diverse tenant mix that are all lab and life science.
And substantially all the tenant base are really, as I mentioned, people who either work at or collaborate with MIT and Harvard, and it's an above 5% cap rate with room to grow. So and it's a fee simple interest, which is very significant in terms of valuation.
Okay, good point. All right. Thank you.
You're welcome.
Thank you. The next question comes from Lukas Hartwich with Green Street. Your line is open.
Hi, thanks. Hi Lukas.
Hi. It looks like Brookdale EBITDAR coverage moved down a tier. I'm just curious how that will look after the planned asset
sales? Hi. Yes, I mentioned that and that's we did the great deal with Brookdale last year. We're implementing that deal, committing capital to the assets and also disposing of a pool of assets that we identified together. The coverage will not change materially because as you recall, Ventas keeps the net proceeds and then Brookdale gets a rent credit equal to 6.25% on the net proceeds that we receive.
So it won't move materially.
That's helpful. And then, you kind of talked about it earlier, but I was just hoping you could provide a little more color on the strong performance in the SHOP portfolio from Canada?
Sure. We love talking about Canada. Grew occupancy, rate, bottom line, we have a great position, wonderful assets in that market. You see the demand growth, what the powerful upside of senior housing can look and feel like, And it had another great quarter. So it's really been a shining star for us over the last couple of years.
Great. Thank you.
Thanks. You bet.
The next question comes from Karin Ford with MUFG Securities. Your line is open.
Hi, good morning. On the last call, you guys talked about an upward drift in cap rates. Is that what you've seen? And if so, how much and in what segments?
Karen, this Debbie. Just commenting on that, I would say that when we talked last quarter, we said we may be starting to see a slight upward tick in cap rates. And I think in some transactions, you still may be seeing that although the quality may not be like for like. Right after I said that of course as interest rate expectations had been moving up, I thought that that was related to some of the potential cap rate expansion that we were seeing. And that of course, those expectations have then changed fairly significantly in terms of people's forward expectations and the actual rates.
And so the impact of that really probably would put a lid on any hoped for cap rate expansion that we might have seen at that time on a like for like basis.
Understood. My other question is, can you give us any insight into SHOP occupancy and rate growth in April? It sounded like you were a bit more cautious given the comments you made on the flu. Just wondering if I was hearing that correctly.
Right, Karen. So the flu was really unusual this year insofar as it was clearly more mild in the Q1 relative to last year. But what's unusual is how it's extended into the Q2. And indeed, Atria has had a few recent buildings closed for flu in terms of quarantine, which is unusual. So that's why we just are flagging it because the key selling season is Q2.
It's an unusual item. I cycle back to though occupancy year on year at down 20 basis points. Which is both share gain, I think, and some of that demand lift we've been talking about.
And did occupancy continue to do well in April?
It's still early days. It's it trends seasonally, it tends to be quite flat this time of year.
Okay. Thank you.
Thanks, Karen.
Thank you. Our next question comes from Jordan Sadler with KeyBanc. Your line is open.
Just thank you. Good morning. Hi, Alex. Hi. Just following up on the shop discussion a little bit.
So I think, Bob, if I recall correctly, you thought throughout the year performance would generally be pretty consistent. Is that generally still your expectation based on what you're seeing in SHOP? And if I could sort of also ask, what are you seeing you've given us previously sort of the re leasing spreads of sort of the street rates. I'd be curious what those are.
Yes. Good questions. Let me start with pricing and RevPAR and the releasing spread. Our guidance for the year, you'll recall, was releasing spreads to be down high single digits. And indeed, that's what we saw in the Q1.
At the same time, the in place increases for residents in place was again healthy. And so the blended average of those two things is what you see in the 30 basis points for the quarter. Now looking at the prior year, we really saw discounting in the back half of the year start to take root and some more aggressive pricing in the back half of the year. So as I think about RevPOR over the course of the year, I think there's some stabilization in the back half of the year that could be potential given prior year comps. To the first question, generally speaking, our range, as you know, for the full year is flat to down 3%.
We were down, call it, 2% in the quarter, so right in that range. And it will be relatively, generally speaking, consistent, I would say. Wild swings are unlikely. Okay. There's always choppiness.
I don't want to kind of overstate the nature of it.
Okay. I think you laid it out well.
The other
question I had was regarding, I think, Debbie, you said you seemed confident about starting the rest of the $1,500,000,000 pipeline over the course of the next 15 months. Did I catch that correctly? So I just want
to make sure. Yes. I am confident because my partner John Cobb is confident.
Okay. So you basically have like $1,000,000,000 to announce?
Right. I mean, so we believe we'll have significant milestones to announce on a number of the projects this year and that we're confident that we'll commence substantially all
the $1,500,000,000
research and innovation pipeline within the next 15 months.
Okay. I think that's a bit faster than I think we thought last quarter when we spoke to you, although maybe you didn't lead us to believe So the last one was just Alexion, what was that termination fee and where is it sitting on the P and L? Sure.
It was $1,900,000 in the quarter. It's sitting in the office R and I, same store in the quarter.
And what's interesting about it though too is that the replacement tenant in Yale moved in to the 250,000 square feet with 0 downtime. So better credit, 25 year lease term, and the fee was kind of the additional benefit, the tail really because the dog is the Yale expansion with us.
Okay. Thank you, guys.
Thank
you. Our next question is from Michael Mueller with JPMorgan. Your line is open.
Hi. Just have two quick questions. So for the $1,500,000,000 starts over the next 15 months, can you give us a rough idea of what the delivery window will span from?
Well, once commenced, the rule of thumb is really 18 to 24 months of until opening.
Okay.
And the projects will be commenced obviously seriatim on a project by project basis over those next 15 months.
Got it. Okay. And then, Bob, just to confirm, so going back to the $10,000,000 lease modification, you said the impact was in 2019. I think you mentioned mid year. So we assume that's a $20,000,000 annualized impact going forward?
Yes. So to clarify, the $10,000,000 is this year impact, Qs 2 through 4. We expect to have effectively activated the changes by mid year, and that obviously helps drive that impact over the course of the year. But it's $10,000,000 over the course of 3 quarters.
Over 3 quarters, okay. So less than $20,000,000 Got it. Okay. That was it. Thank you.
You bet.
Thank you.
Thank you. The next question comes from Chad Dannakar with Stifel. Your line is open.
All right. Thanks. Good morning, all.
Hi.
Hey, Deb. So just looking at the shop occupancy, it's down same store 20 basis points in year over year, 120 basis points sequentially. How much of that would you estimate is normal seasonal weakness from flu and weather and how much of that is from excess supply pressures?
Well, seasonally, you're right to say that there's typically a decline Q4 to Q1. So we tend to look year over year as our best measure. And the 20 basis point GAAP, when you go back, as you know, and look back last year, starting out in the first half, we had, call it, 100 and 50 basis point gap versus prior year. That narrowed by the end of the year, and it stayed pretty consistently tight to prior year at 20 basis points down. So the occupancy line, we're feeling pretty good about.
And again, I think it's reflecting that we're gaining share.
All right.
So in light of that view, how should we expect shop occupancy to trend from this point to the end of the year, especially considering comments that you're seeing some tick up in demand?
Well, we're staying with our guidance really through the P and L, which for occupancy was flat to down 50 basis points for the year on average. So I think that's still a good number. Okay.
Okay. All right. Just one more quick one. So you're marketing 20 assets with Brookdale. How much of the total $30,000,000 in rents that you agreed to does that represent?
So I guess there's more to come.
We expect there to be a total of about 15 ultimately and maybe that may be it, that may be all that we decide to do with them.
Yes. I'm sorry, Deb, was that 15 in rents or 15 more assets?
In total, not just the ones that we're marketing now. Okay. It's 15,000,000 in rent. Yes, exactly. Thank you.
Thanks a lot.
Okay. We have time for a couple more and then we'll wrap up.
All right. The next question comes from Derek Johnston with Deutsche Bank. Your line is open.
Good morning and thank you.
Hi, Derek.
Hi, Derek.
Hi. Just a little more on SHOP revenues and I was hoping you could help reconcile the strong January rent increases from in place residents as mentioned in the release with really the first time we've seen RevPOR drop below 1% on a year over year growth basis and really the first time your year over year same store shop revenue growth has been negative, at least as far back as we've been tracking since 2010?
Sure. I mean, a very quick and simple answer is the releasing spread discussed earlier. Again, the in place is very strong. What you have to look at is last year over the course of the year, what happened? The price competition was suppressing price over the course of the year.
And therefore, Q1 versus Q1 year over year, that is driving the impact. Now in the balance of the year, particularly the second half, we'll be lapping that discounting. So that should firm up, but really it's a year over year comp issue driven by the releasing spread.
Got it. Understood. And then just kind of looking forward, when do you think we see an inflection point in senior housing and really a return to growth within that portfolio? Is it like a mid to late 2020 event as supply wanes and comps get a little easier? Or how should I kind of think about this going forward?
Derek, you will be the first to know.
Thank you.
It's a very good, very important, very complex question and we look forward to giving you more visibility on it.
Thank you. And our last question
On the Cambridge acquisition, I know it's 100% leased, but I don't think I heard the lease maturity. When would you be able to reset those rents?
Yes. Another great question. Because we're looking at upside here. We talked about the cyclical upside in senior housing and now we'll talk about the asset. The weighted average lease term right now is about 5 years.
One of the things we really like though about this market and its characteristic of this building is that the tenants are successful, they expand, maybe there's not enough room for them in this particular building And so they may buy out of their lease early and then you have a chance to mark to market and you may have the opportunity to get a lease termination fee. So that's how we would expect it to play out.
Okay. That's great. And then just one more. It looks like Eclipse annualized NOI was down 15% year over year despite 1 more property versus a year ago. I'm just curious how should that portfolio trend throughout the year?
And maybe what kind of happened versus a year ago?
Yes, Jonathan. I think when you look
at the
annualized NOI Q1 versus Q4, you get some of the technical factors, namely days that play a role in there, fewer days when you bill by the day as a revenue and NOI impact. And so that annualized is much of what you're seeing.
It's been exaggerated.
Yes. Stepping back, we believe ESL is going to be accretive to our growth this year and they continue to implement the plans they identified early on.
Right. But I mean on a year over year, it was down 15%. So that should negate the seasonality impact, right?
Well, I'm very there's a lot of noise. As you know, we transitioned this time last year, Q1 last year. So there's a lot of noise in the ESL P and L. I would encourage you to look over a longer period, when you think about year over year. And again, on that basis, I think they'll be accretive to our growth.
Okay. All right. I'll follow-up offline. Thanks.
Okay. We appreciate that. And we absolutely appreciate everyone's attention this morning and interest in the company. The whole Ventas team is really excited about delivering an excellent quarter and we look forward to seeing you in Philadelphia in June. So thank you again.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.