Good day, ladies and gentlemen, and welcome to the third quarter 2018 Ventas Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, you may press star then zero on your touch-tone phone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ryan Shannon, Investor Relations. Sir, please begin.
Thanks, Norma. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the third quarter ended September 30th, 2018. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. The company cautions that these forward-looking statements are subject to many risks, uncertainties, and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.
Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10-K for the year ended December 31st, 2017, and the company's other SEC filings. Please note that 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 at www.ventasreit.com. I will now turn the call over to Debra Cafaro, Chairman and CEO of the company.
Thank you, Ryan, and good morning to all of our shareholders and other participants. It's great to be with you on today's Ventas third quarter earnings call. I'm also delighted to be joined by members of the Ventas team to report on another solid quarter and to highlight our financial strength, our investment in growth, expanded pipeline and partnerships, and commitment and recognition to ESG. After Bob provides detailed insights into our financial results, we'll be happy to answer your questions. Let me start with our results and full year 2018 expectations. We're pleased to report normalized funds from operations of $0.99 per share this quarter to improve our full-year normalized FFO expectations and to confirm our same-store cash NOI expectations for the year. Turning now to our enterprise and capital allocation strategy.
We continue to enhance the long-term durability of Ventas by following our differentiated and deliberate approach of investing in our future growth with top-tier customers and extending and expanding our key partnerships. First, this quarter and immediately following, we invested approximately $100 million in attractive medical office building and outpatient facilities with two key partners, Ardent and Pacific Medical. We also announced our pending acquisition of a premier independent senior living community located in the appealing Battery Park neighborhood of downtown Manhattan, firmly establishing our leadership in the high-end senior living Manhattan market. Second, we extended our exclusive partnership with Pacific Medical, or PMB, for a further 10-year term. With almost 50 years of experience in outpatient facility development with key U.S. health systems, PMB's knowledge and expertise in development is extraordinary.
The attractive MOB investments we made this quarter are an example of the benefits of our partnership with PMB, as is our trophy MOB development attached to Sutter's new flagship hospital in downtown San Francisco, which is on track to open in early 2019. We are also happy to report on the great performance, lease-up, and delivery of our university-based research and innovation centers. Our forward pipeline of excellent projects is robust and growing. In light of strong university demand, our leading market position, and the positive risk-reward investment profile of these projects, we intend to ramp up our investment activity in this space. The attractiveness of our university-based development model was recently brought to life at a summit hosted by Ventas and our partner, Wexford.
The buzz among attendees was palpable as we brought together leaders from universities and academic medical centers to share ideas and discuss innovative approaches to achieving their strategic goals. Our partner, Wexford, is a trusted advisor catering to university needs and enjoys an incredible track record and reputation for conceiving, building, leasing, and delivering powerful knowledge communities on university campuses that supercharge research and innovation. We are proud to partner with these leading universities and Wexford and to fund and own these knowledge communities for the long term. In this business, I would like to note that one of our newest research and innovation buildings at Penn just opened.
This project, which is on the precipice of already being 90% leased, further builds out our footprint in the attractive U City sub-market. The success of this project follows on the heels of another recently owned project at WashU's Cortex Innovation District, which we expect to be 100% leased very shortly. Finally, Atria Senior Living also continues to distinguish itself. In addition to Atria's consistent operational excellence in our portfolio, it just inked a $3 billion agreement with the Related Companies to develop high-end urban senior living projects in major markets. We are effectively a general partner in these potential projects through our one-third ownership interest in Atria. With Atria's expertise and Related world-class development capabilities, we are excited about the potential for this deal. I would like to turn to another area where we are making significant investments, specifically environmental, social, and governance, or ESG matters.
We believe that our commitment to ESG principles underpins our long-term success. This year, we have been recognized repeatedly by leading organizations for our positive impacts. Today, we are pleased to launch our inaugural corporate sustainability report, showing our leadership and commitment to ESG policies and practices. I'd like to give a special shout-out to our whole ESG team, who worked long and hard at improving our ESG profile showcased in this excellent report. To my mind, sustainability starts with financial strength and resilient cash flows from a high-quality, diverse portfolio. At Ventas, we are focused on both. This quarter, we continued our proactive and successful efforts to build financial strength and reduce risks through debt refinancing and maturity extensions. Our portfolio produced growing same-store cash NOI performance of 1.3% as a result of its quality and diversification in product types and operating models.
Looking at macro senior housing trends, we are very encouraged with the recently reported continued improvement in senior living starts, which are at a five-year low. Importantly, in primary markets, net absorption in assisted living in the third quarter of 2018 was the strongest third quarter for net demand on record. However, as has been widely documented, we expect to experience another year of elevated deliveries in 2019 as the industry works its way through the opening of new communities that were started in anticipation of the demographic demand that will accelerate in the coming years. If current trends continue, the current supply-demand equation will surely reverse in our favor. That's why our senior housing assets continue to be so highly valued.
Finally, we are always mindful that seniors live in our communities, patients are receiving healthcare in our facilities, and tens of thousands of employees are serving in our properties. Thus, we were heartened when all seniors, patients, physicians, and employees were reported safe despite the devastation of recent hurricanes Florence and Michael. We're thankful for the preparation and execution by our care providers, especially Ardent, whose team exercised extraordinary effort in the face of the storm. We sincerely thank our operating partners for their preparedness and care. In sum, our cohesive team is confident in our enterprise and our continued success. This confidence is founded on the resiliency of our portfolio, our financial strength, our focus in increasing investment in our future growth, the quality of our partnerships and relationships, and accelerating demographic demand. I'm now happy to turn the call over to our CFO, Bob Probst.
Thank you, Debbie. Congratulations on once again being named as one of the top 100 best-performing CEOs in the world by Harvard Business Review. I'll begin with a review of our segment-level performance, which on a combined basis delivered solid portfolio same-store cash NOI growth of 1.3% in the third quarter. Let me start the segment discussion with SHOP and the key leading indicator for future SHOP performance, namely the new construction starts. We are very excited that the trend line of lower new construction starts in our trade areas continued in the third quarter. In fact, new store starts for our portfolio are at the lowest level observed in nearly five years. Annualized new starts for the first three quarters of 2018 represent just 1.7% of inventory in our trade areas, well below the roughly 2% near-term demand growth rate for our senior target market.
In terms of current performance, third quarter SHOP NOI performed in line with our expectations, with same-store cash NOI lower versus prior year by 2.7%. Occupancy was ahead of our expectations while rate growth moderated, together delivering 1.2% revenue growth in the quarter. Occupancy in the third quarter reached 88%, a sequential improvement of 80 basis points, which is better than our normal seasonal trends and better than the industry overall, as reported by NIC. On a year-over-year basis, the gap in SHOP occupancy also improved in the third quarter to 60 basis points below Q3 of 2017. Third quarter RevPOR growth moderated to 1.8%, as new competition drove wider releasing spreads. Operating expenses grew 3.1% in the third quarter. Wage costs per hour continued to run at roughly 4%, partially offset by more efficient staffing levels and reduced indirect costs.
At a market level, we're seeing strong NOI growth in Los Angeles and San Francisco. Meanwhile, NOI is lower in markets affected by new competition, such as Atlanta and Chicago. Our SHOP 2018 full-year same-store NOI guidance range remains unchanged at -1% to -3%. Though we will give formal guidance in February with the benefit of observing our year-end finish and early start to next year, we do expect elevated levels of new deliveries to continue in 2019. As a result, same-store SHOP NOI may evidence a similar year-over-year percentage decline in 2019 as in 2018. That said, with the positive trend of lower new starts together with accelerating demand, we do expect supply-demand fundamentals to offer powerful senior housing upside over time. Our valuable office reporting segment, which comprises 26% of our portfolio, increased same-store cash NOI by a robust 3.5% in the third quarter.
The office segment was led by a terrific result from our university-based life science portfolio, which grew same-store cash NOI by 12.4% in the third quarter as a result of strong lease-up activity. The total life science portfolio grew NOI by nearly 23% in the third quarter, fueled by exciting new projects at WashU, Duke, and Penn. For the full-year life science same-store pool in 2018, we continue to expect very robust same-store NOI growth in the range of 3%-4%. Our reliable and valuable medical office business grew same-store NOI by 1.1% in the third quarter as a result of in-place escalators approximately 3%, and best-in-class tenant retention of nearly 87%. Q3 operating expenses were 3% higher versus prior year, due in part to timing of expenses. We continue to forecast a 1.5%-2.5% full-year NOI increase from our same-store medical office portfolio.
Our combined office portfolio of life science and MOB assets same-store cash NOI guidance range is also unchanged at 1.75%-2.75% growth for the full year 2018. A quick note on the recent hurricanes is appropriate here, as their principal impact was on two Ventas-owned MOBs and one Ardent-owned hospital in Panama City, Florida, which were significantly damaged. It is too early to determine the financial impacts of the hurricanes, and therefore they are not included in our guidance. Moving on to our triple net lease segment, which grew overall same-store cash NOI by 3% in the third quarter. In-place lease escalations were the primary driver of this increase. In terms of rent coverage, trailing 12-month EBITDARM coverage in our triple net same-store seniors housing portfolio held steady at 1.2 times through Q2, our latest available reporting period.
Notably, the asset sales announced as part of the Brookdale transaction are progressing. We expect the first tranche of these sales to occur in 2019. In our triple net post-acute portfolio, cash flow coverage held steady at 1.4 times. We continue to expect our LTACs to generate improving results in the second half of 2018, with operational strategies mitigating LTAC criteria. In health systems, Ardent coverage remains strong and steady at 2.9 times on the back of a solid second quarter. Momentum at Ardent continues, and the business is performing exceptionally well. We are holding our 2018 same-store NOI guidance range for the triple net portfolio overall to grow between 2.5% and 3%. Finally, our book of loans extended by Ventas now stands at 4% of NOI, down from 7% at the start of 2018 due to repayments of profitable loans.
We expect further reductions to our loan investment book, with maturities on existing loans of roughly $300 million in the second half of 2019, with proceeds earmarked to fund our exciting life science development pipeline. Let's turn to our overall company third-quarter financial results. Normalized FFO per share was $0.99 in the third quarter. This result was principally driven by two factors. First, the expected receipt of a $0.03-per-share fee from Kindred's successful go private transaction in July. Second, the dilutive net impact of $1.3 billion in disposition and loan repayment proceeds received in the first half of the year and used to reduce debt. Stepping back since 2005, we have completed nearly $8 billion in value-creating capital recycling activity. Over that same time period, we have also been highly proactive in refinancing our debt maturities to extend duration and limit interest rate exposure.
In 2018 alone, we have retired or refinanced $3.2 billion in debt. As a result, we have a strategic asset in our sector-leading financial strength and flexibility. Some evidence from the third quarter. Fixed charge coverage was 4.6 times at quarter end. Our net debt-EBITDA ratio stood at 5.4 times. Less than 12% of our total debt matures in the next three years, and we enjoy liquidity of nearly $3 billion. Our aggressive efforts to reduce debt, extend and stagger our maturity profile, and significantly reduce medium-term refinancing risk, has already paid off as we completed these efforts prior to the recent strong move upwards in rates. Let's close out the prepared remarks with our 2018 guidance for the company.
For 2018, for the third time this year, we are improving our full-year outlook for normalized FFO per fully diluted share, which we now forecast to range between $4.03 and $4.07.
We have also confirmed our total and segment-level same store cash NOI guidance for the full year 2018. The assumptions within this guidance range are substantially the same as our previous guidance in July, including the previously described $1.3 billion in capital recycling and related debt retirement. To close out, the Ventas team is cohesive, determined, and sharply focused on delivering against our financial commitments as we close out 2018. With that, I will hand it back to the operator to open the line for questions.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star, then one on your touch-tone phone. If your question has been answered or you would like to remove yourself from the queue, you may press the pound key. In order to give all participants the opportunity to ask a question, please limit your follow-up questions so that we may progress efficiently through the question and answer session. Also, to avoid any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Smedes Rose of Citi. Your line is open.
Hi, good morning.
Good morning.
Good morning. I wanted to ask you just on your SHOP guidance for next year. One of the things you pointed out is there's about 7% of in-place inventory under construction in primary markets. Do you have a sense of what percentage will open over the course of 2019? Would you think it would look kind of similar to that 12-month trailing that you just mentioned? Just on that front, what are your operators telling you about wage increases going forward into next year, their expectations around that?
Sure. Hi, Smedes. This is Bob here. First of all, just to clarify, an early indication for SHOP of 2019, I would say, as opposed to formal guidance, we'll give that in February. There are things we now know standing here today, which include deliveries. Having seen three quarters of the year, we have a pretty good view into delivery levels next year. Our view today is that they're roughly in line with where we're going to see 2018 pan out. Effectively equivalent on the deliveries line, and therein led to the comment to say we expect performance in 2019 to look quite similar to 2018 in terms of year-over-year. Within that, of course, the same themes I would highlight, whether it be price, occupancy, wages. The same themes will likely play out in 2019 as we saw in 2018.
Again, we want to see the year-end, we want to see the rate letters and so on before we give formal guidance.
Okay. Just with your relationship with Atria, will you be investing more capital into that relationship now given their announcement with Related, or does that remain unchanged?
Hi, this is Debbie, Smedes. The deal with Related is a really exciting one and has the potential to be $3 billion of high-end urban senior living over time. We will have the opportunity, of course, to invest capital in an effectively general partner position in those projects. If there are other opportunities to invest capital in the projects that we see as attractive, those opportunities could manifest for us as well.
Okay. Thank you, guys.
Thank you.
Thank you. Our next question comes from Juan Sanabria of Bank of America. Your line is open.
Hi, good morning.
Good morning, Juan.
Hi, Juan.
On Holiday, just wanted to ask about that. Some of your peers have been talking about having been approached about converting some of their leases to triple net REITs. Can you confirm if you've been approached and how you're thinking about your exposure? Also as part of those broader discussions, are you interested in acquiring any incremental Holiday assets at this point in the cycle, given they may become available for sale?
Good. I'd like to put Holiday into context for Ventas. It's about 3% of our NOI, and as you know, they did do a deal with New Senior that is public that has a conversion of assets from a lease to a management fee management structure with the payment of a large fee connected therewith. I think, just like every other customer that we have, we would typically engage in conversations, just like we did with Brookdale, just like we've done with Kindred over the years. We will be thoughtful, I think, and have a lot of ways of coming up with optimal changes should we believe they're appropriate.
Just on the seniors housing on the RIDEA side, going back to that, can you comment on how new and renewal spreads are trending and if there has been any expansion between those two? Looking at the sequential same-store numbers, it looked like RevPAR did come down despite occupancy ticking up. I am not sure if you could comment on what drove that specifically. I do not know if that was eclipse-related or not.
Sure, Juan. I think you are referring to RevPOR, which was 2.1% year-over-year in the second quarter, 1.8% in the third quarter. That is driven by what I call re-leasing spreads, or new leasing spreads, if you wanted to refer it to that way. In other words, former resident to new resident, what does that look like? That, I quoted last quarter, was about mid-single digits down, and that has widened a bit. Again, that is one of the artifacts of new competition. That is really what is driving that drift sequentially.
Okay. Thanks very much.
Thank you.
Thank you.
Our next question comes from Michael Carroll of RBC Capital Markets. Your line is open.
Yeah, thanks. Bob, the quarterly run rate, FFO run rate, has bounced around this year. The guidance is currently implying that there's going to be another drop in the fourth quarter, even if you exclude the Kindred fee this quarter. Can you kind of provide some color on what is the correct run rate of FFO, and what's driving the drop between 4Q and 3Q?
We've been asked to repeat the questions. I understand there may be some static on the operator's line, for which we apologize. I think in sum, the question is really to discuss the fourth quarter normalized FFO rate implied in our 2018 guidance.
Right. Just to frame that again, the third quarter FFO was $0.99. That included a $0.03 Kindred fee, which we were very explicit about last quarter. In fact, received as of this call last quarter. That's in the third quarter. When you adjust for that's $0.96. As you say, the implied midpoint when we look at the fourth quarter is approximately $0.94. What's going on there? The key, as we think about it, this is a first half to second half conversation, but most now evident in the fourth quarter, is the cumulative impact of the dispositions that we've seen over the last year, including the LHP repayment, including the Kindred dispositions of last year, and effectively using those proceeds to retire debt. That now really is complete.
It was complete as of the end of the second quarter, we're seeing that run rate impact really manifest in the fourth quarter.
Okay, great. Last question from me. Debbie, I think in your prepared remarks that you highlighted that you expect a ramp-up investment within the Wexford platform. Can you quantify what that ramp-up means? It seems like the investment's been trending between $300 million-$500 million. Will 2019 exceed that pace?
Well, as I mentioned, we're seeing a lot of good projects. They're large and they're high-quality projects with elite institutions, either existing customers or new universities. The timing is harder to predict with certainty, but I could see that substantially increasing.
All right. Thank you.
Thank you.
Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open.
Thanks. I guess I just wanted to follow up on that last line of questioning. Bob, you made the comment that most of the dispositions were sort of done by the end of the second quarter. I would have thought that the negative impact would have been felt fully in the third quarter, and therefore there wouldn't be a further drop from Q3 to Q4. Can you just maybe help me understand, were all of those really not done by the second quarter, or is there something else that's kind of dragging down Q4?
Sure, Steve. The question is why does 96 go to 94 third quarter to fourth quarter sequentially when adjusted for the Kindred fee? I would point to seasonality, particularly in SHOP for that difference. That's the key item. The fourth quarter on a dollars basis is seasonally lowest at that stage, and that's really the biggest driver, Steve.
That really has to do with seniors' behavior, moving in and around the holidays and things like that. That's a typical pattern.
Got it. Okay. Thank you.
You bet.
You're welcome.
Thank you. Our next question comes from Rich Anderson of Mizuho Securities. Your line is open.
Woohoo. If I could get back to the run rate question I think Mike asked earlier. If you take 94 and multiply it by 4, you're at 376. Consensus for next year is $4. I know you're not giving guidance, let me maybe frame the question this way. I know you also said that you're ready to do some more on the life science side, is this the time to be a buyer in senior housing as well before this inevitable turn starts to happen? I think everybody on this call is waiting for the next big thing from Ventas, I'm wondering how you feel about that in context with what the Street is currently thinking about you guys for 2019.
Okay. I'll try to repeat the question.
Good luck.
I think it started with woohoo.
Yeah.
The question is really around buying senior housing. Is that if I could summarize, Rich?
The noise just went down a little bit. When you annualize your 94 run rate, you get to a lower number for 19 versus what the street is currently expecting. I'm wondering if perhaps the missing variable is something going on. Is this the time for Ventas to be buying senior housing before the recovery actually starts to take shape?
Good question. I would say that we are, for example, buying the Trophy Battery Park asset because we do see strength there. The good news, as I said, is our assets are very highly valued, there continues to be a very strong bid in senior housing, for the inevitable upturn. We are continuing to look at investment opportunities that we think will do something for Ventas strategically, creatively, very open to value-creating transactions. As always, we'll be opportunistic and if there's a next big thing, you'll be the first to know.
Okay. If I could just get a reconciliation and an explanation. Bob, you reiterated the same store guidance of 35 basis points to 1.5%. On the back of the supplemental, the range in the more detailed breakout is lower, 0.6%-1.3%. What is the difference?
Rich, can you refer us again to the page? We didn't hear you.
It's the last sort of guidance breakout page of the supplemental. If you look at it, the total same-store growth is 0.6%-1.3%. I'm just curious what the difference is between the published same-store outlook.
Yes, our total company outlook, which has been reaffirmed, is the $0.75-$1.50.
The difference, Rich, you'll see a line item there, which is called fees. That's the Brookdale cash fee we received in the year. If you adjust for that item, it's included in the guidance, we want to show it with and without that item, that's the difference.
I see. Okay. That's all I needed. Thanks, Bob.
Yep.
Yep.
Thank you.
Our next question comes from Jordan Sadler of KeyBanc Capital Markets. Your line is open.
Thank you. Good morning.
Good morning.
Yeah, morning. It looks like there may be a little bit of an increased appetite for traditional MOBs. Any insight you could offer there? Maybe a little bit of a compare and contrast on what was sold versus purchased since the end of last quarter?
The question was really about our investments in outpatient and MOBs. We have built a great business here, which is 19%-20% of our portfolio. We like this business. It's been a very steady grower, very reliable. I'm going to turn to Peter Bulgarelli, our new leader of the business, to talk about what we like about the investments that we made.
Sure. Thanks, Debbie. As Debbie said in her opening remarks, we're being very opportunistic and careful with our investments, but these five assets that we've bought and the one additional, we felt fit our operating thesis very well. They're in great locations, primarily in California, Arizona, and Texas. They're associated with great hospitals, Baylor, Dignity, and Tenet. They're essentially fully leased, and very importantly, they're associated with key partners of ours. One of them is associated with Ardent, and we have an existing MOB on that same campus. Five others are with PMB, our key development partner. The last piece is that all these transactions were off-market, they were very attractively priced.
Thanks, Pete.
Pete, can you expand on maybe the asset that was sold? I know, I think you had a 40% stake in that one, the cap rate there was a bit higher relative to the going-in cap rates on the acquisitions. Maybe talk about the quality or the caliber of that asset.
Yes, this is Debra. Real quickly, Jordan. The question was about a sold asset, that was pursuant to a purchase option.
Oh, okay. Makes sense.
Okay.
Lastly, one more quick one for Bob. Hey, Bob, can you just clarify the re-leasing spread calc that you quoted? Does that include concessions, or is that just straight face value to face value?
That's base rent, face value to face value. It's actuals, so it's not like a street price against which there are significant discounts. It's actuals. I think it's a pretty clean number.
Okay, thank you.
Thank you. Our next question comes from John Kim of BMO Capital Markets. Your line is open.
Thank you. On your early indication for SHOP next year, can you provide some color on some of the components of this? In other words, may occupancy be higher, offset by lower rate growth and higher expenses?
Good morning, John.
Sure. I'll summarize the question. Could we have some more insight into your 2019 early indications as we look through the P&L? I would say the themes, again, very similar. If you just look at the third quarter P&L, I think it's a nice guide as we think about next year in the sense of year-over-year occupancy has been improving, albeit still a gap to prior year. Some moderating pricing. I expect we'll still have nice price increases on the in-place annual rent letters that we get in the beginning of the year. I do expect we'll have some of the continued pressure through releasing spreads through the balance of the year. On the operating expense line, certainly, the tight labor market wage pressure will carry on as we think about next year.
The operators have done a wonderful job this year, as I've said repeatedly, in the staffing models and how they've managed that cost. I do expect there's some runway to continue there as we think about next year, again, you have to look at that relative to the occupancy line also. Very thematically similar to the P&L as we look at the third quarter.
Thanks for that. Bob, for this year's guidance, your CapEx, to get to FAD is $145 million at the midpoint. Year-to-date, your FAD CapEx is $79 million. Are these two comparable figures?
A great question. The question is the ramp on FAD CapEx in the fourth quarter and is it achievable, would be my interpretation of the question, it is a significant ramp. We typically do have seasonally in the fourth quarter, a significant increase. That hill to climb this year is a bit steeper. All else equal, perhaps we have a little bit of, quote, "opportunity" there, seasonally, we do expect a significant increase in the fourth.
Okay. Finally, the feedback from the NIC conference seems to be there's an abundant amount of capital looking at the healthcare space. I'm wondering if you agree with this characterization that it's increased, and also what verticals that may impact the most?
The question really is about the capital that's interested in our business lines, and the answer is yes. Over the 20 years when I couldn't get anyone to talk to me about healthcare at the beginning to now where it has been a highly institutionally attractive business for all the qualities we discussed, whether it's MOBs and the core-like returns that you get there, the demographic demand in the asset classes that we have, the private pay nature of senior housing and multifamily shared characteristics. We are very attractive and therefore capital is coming our way and that continues to enhance and improve the value of our assets as people look to the coming years when, not too long from now, 20% of the population will be in the senior category. You are 100% right with the interest in our verticals.
Is that broad-based or is it a specific sector that may benefit more than others?
It is fairly broad-based at the moment. I do think that the highest interest from institutional capital is in senior living and MOB outpatient, but we also see significant interest in the hospital space, for example, as we look to the performance of the public and rate increases that have started in the fourth quarter. It's fairly broad-based.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Chad Vanacore of Stifel. Your line is open.
Yeah. Thank you a lot, good morning.
Good morning.
All right. Just a couple quick ones here. One point of clarification. Your supplement shows a billion and a half dispositions year to date, but guidance only assumes $1.3 billion. Since it doesn't seem to refer to net dispositions, what's the difference there?
Sure. The question is, on the supp we show $1.5 billion of gross dispositions. Our guidance says $1.3. The difference is our share, Chad, of that. It's not all 100% owned. That's the net difference.
Okay. Just looking at your segment guidance, your overall NOI guidance hasn't changed, but SHOP looks a little bit lower and then non-segment is higher. What's pushing that non-segment guidance higher?
The question is about our segment guidance, which again, we've reconfirmed from the July 27th guidance, and Bob can speak specifically if there's anything further you'd like to add.
Yeah, what's pushing the non-segment guidance higher?
Yes. Some small amount of acquisitions. The net impact of small amount of acquisitions that we've built in now is in non-same store. That's the difference.
Okay.
All right. What assets are in there?
Those that we reported in the sup. Oh, sorry. Those that have been reported in the supplemental. That's the impact.
All right. Let's move on. Just any update on your selling of Brookdale leased assets? You remember earlier in the year-
You agreed to market up to $30 million of rent?
Yep. Good. Yes. We, as you recall, did a deal with Brookdale that extended the leases and had some other components in it, including asset sales of about 15% of the portfolio to prune the portfolio and improve the quality. That does represent probably about $30 million in rents. As Bob mentioned in his remarks, those are starting to get underway.
All right. Just early in the marketing stages right now?
I would say, just emerging, yes. Pre-marketing, I would say, at this point. We expect those sales to happen over time. As you recall, they would basically be effectively at a six and a quarter to Ventas.
All right. Thanks. Second questions.
All right. Thank you for joining.
Thank you. Our next question comes from Tayo Okusanya of Jefferies. Your line is open.
Yes. Good morning. Please indulge.
Hi, Tayo.
Good morning. I might ask one additional question, if you don't mind.
Absolutely. Go right ahead.
The first one, again, is, I think, Rich and Bob kind of alluded to this earlier on. When people just take a look at the run rate, it almost kind of implies that something big has to happen next year in order for Ventas to get closer towards consensus numbers. You talked a little bit about university MOBs being an area you want to put more money to work in. Just curious, one, is that somewhere where you can actually grow fairly quickly? Like is there a Wexford type transaction available in that group? If it's not a university MOB type deal, would you possibly consider hospitals where, again, the yields there are pretty attractive relative to your cost of capital?
The question really is about the fourth quarter run rate and how that may relate to analyst consensus numbers. I would just say that, when we provide guidance, we typically do so with limited to no acquisitions in them, and we will obviously do so consistent with our practice in February. Other than that, I think I would just repeat what Bob said about the fourth quarter 2018 run rate.
Okay. That's helpful. I guess when we think of the acquisition outlook, again, on the MOB side, is there something big that could happen outside of the traditional space, more on the university life sciences side, a la Wexford? Is it a hospital type transaction that could make up the difference if you're still actively looking at that space?
Well, as you know, acquisitions and investments are always difficult to predict, and they're lumpy. We've done more than our share over the years. We have these great relationships that we are able to leverage to find good strategic accretive acquisitions. They could be across the board of our asset classes. I do want to remind you that our number one capital allocation priority is really in the development of these university-based knowledge communities. When we talk about investing in future growth, those are assets that we will deploy capital into. We will ramp that capital, and that generally takes multiple years in order to produce cash flow EBITDA. We are thereby creating a very high-quality company, very high-quality portfolio, and investing in future growth. I think that's an important other aspect as you think about our investment priorities going forward.
We'll continue to be opportunistic. We'll continue to look across the board as we have in the past. Those tend to be, again, unpredictable, and therefore, we generally don't attempt to predict them while you guys sometimes try to.
That's fair enough, Debbie. I appreciate that.
Thank you.
Another quick one for Bob. Again, I'm sure it's something I'm just missing, but the big jump in the triple net lease rental income from Q2 to Q3. Just trying to understand what that was.
Tayo, we're having some bad feedback too. Could you repeat the question, please?
Yes. It's one for Bob. The triple net lease rental income, there was a big jump in Q3 versus Q2 for about $23 million. I'm just trying to understand what that was. Did you get that?
Tayo, can you hear me?
Yeah.
We had a write-off of about $22 million as a result of basically the closure of a JV that we had, that had Brookdale.
We had a write-off in Q2.
The Brookdale lease extension, pardon me, was approximately $21 million that we wrote off in the second quarter last year, or last second quarter.
Just last quarter.
We don't have that sequentially. That's that item.
Okay. Just that one item. Okay.
It's that one time. Correct. That's what it is.
When you do Q3 earnings, that'll be versus out.
Right.
Gotcha. All right. That's helpful.
Yep. Remember that, and then just to repeat, that's a non-cash item.
Right.
Yep. All right. Excellent.
Great.
Thank you.
Thank you.
Right.
Thank you. Our next question comes from Lukas Hartwich of Green Street Advisors. Your line is open.
Hi, good morning.
Good morning.
Given the tight coverage on triple net senior housing, I'm just curious how comfortable you guys are that those properties are receiving the necessary CapEx to not only maintain, but also compete effectively with all the new supply growth.
Let me repeat the question. I think it was about the triple net senior housing portfolio and CapEx expenditure. Most of our leases have minimum CapEx required expenditures, most if not all. We monitor that, and that's the way we ensure that the assets continue to be in good market position. I would also add that the Brookdale portfolio, which of course is, 40% plus of that portfolio, that does have minimum expenditure requirements. We also agreed with Brookdale that for other CapEx that we think would keep the assets in excellent market positioning and so on and so forth, that we would consider funding additional CapEx for a market return. There are two different ways really that I could give as examples of the way we can ensure that those triple net assets continue to maintain market positioning.
Great. Very helpful. Thanks.
Great.
Just one other quick one. Can you provide some color on the strong print for life science NOI growth?
Sure. The question was the strong quarter we had in life science, 12% growth, and that was really, first and foremost, lease up, particularly in one of our newer communities that we have with Brown in Rhode Island, which is now 100% occupied, performing incredibly well. That is really the driver for the quarterly pool. On the full year pool basis, we continue to do incredibly well. Also, over 4% growth on the full year pool, strong every which way you look at it.
Thank you.
Thank you.
Thank you. Our next question comes from Karin Ford of MUFG Securities. Your line is open.
Hi, good morning.
Hi, Karin.
Hi. Wanted to ask about the Battery Park acquisition.
Okay.
What type of value creation opportunity do you see there? How do you expect the 5% cap rates to trend, and would you like additional scale in New York City?
Great. The question is really about the pending Battery Park asset acquisition. That is a deal that we're excited about. We've been in the Manhattan senior living market really since 2011. We think that the pricing on this asset is well below replacement cost. We could foresee with the attractive demographics in New York and the unique positioning of this asset, that we would have obviously just stabilized NOI growth going forward. There are potential redevelopment and licensing opportunities over time that could provide additional opportunities for really great returns. We have multiple paths to success, is what I would conclude.
Great. Thanks for that.
Sure.
Second question is just a follow-up on John's question from earlier. Are you seeing any change in the cap rates in any of your segments? Have you changed your return expectations with the move-up in base rates or with your increasing excitement about the university life science investment process?
The question is really on cap rates. I'm sitting across from John Cobb, our Chief Investment Officer, I would say that this amount of capital that is attracted to our space for all the reasons previously mentioned, is continuing to keep valuations high, and cap rates relatively in the same range that they've been for several years now. In terms of the way we underwrite assets, we obviously are always looking at our cost to capital. We're looking at the growth rate of the asset, the reliability of the expected cash flows. As we look at the university-based life science, as we said at the beginning, there is a range of stabilized yields that we would expect that are in the, frankly, 6%-8% or 8.5% range, depending on the profile of the asset. As we've discussed before, I'll give you an example.
If you have a 100% pre-leased building with a AA credit that is in a great location, that's going to be on the lower end of that. If you have a 20% pre-leased building, that obviously would have a different expected stabilized cap rate. That's how we're looking at these opportunities. The big takeaway is, at the end of the day, as we grow this part of our portfolio, it is increasing and improving the overall age, quality, and reliability of our portfolio with these highly rated, really elite institutions. I hope that's responsive, Karin.
Yes, it was. Thank you.
Good. Thank you.
Thank you. Our next question comes from Todd Stender of Wells Fargo. Your line is open.
Hi, thanks. Good morning.
Good morning, Todd.
Back to the MOB transactions. The cap rates shown on the four you acquired was a 5.6. Does that include any fees you pay PMB? Maybe you could talk about some of the economics around your relationship with PMB and just how did you get that, what I would consider above market yield.
Right. As Pete said, the question is about the yield on the acquired MOBs. As Pete said, because these were assets that we acquired through existing relationships, we do think the pricing is very attractive. In terms of the NOI, to the extent that there is a management fee for the assets, that's embedded in the cap rate already.
How about same-store expectations for these four? I think Pete may have said their California exposure, maybe Texas, I forget the other states, but maybe a range of NOI expectations.
Again, what we like about the MOBs is the core-like returns and the steady returns. We would expect that type of normal MOB year-over-year growth rate.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from Daniel Bornstein of Capital One. Your line is open.
Hi, how you doing?
Hi, Dan.
Hey, good morning. I want to switch it up just a little bit and just ask about how ESL is doing and whether that was the outlook for 2019. I know it's a preliminary outlook, includes ESL performance in that.
ESL, now, I guess, eight months old or so, maybe 10, continuing to roll out operational initiatives, I'd say Kai and team are deep into that right now. Things like the staffing model and the operating model and really bringing best practice there. They're on it. Certainly, we've seen some transition impact in terms of NOI. That's always expected. Again, I think we've stabilized on that, and we're looking forward to the impact of those initiatives as he's rolling them out.
Okay. I just try and ask also, are they performing better or worse than the general Ventas previous SHOP portfolio? Do you have positive NOI versus the negative NOI that we're seeing?
Yeah. I think again, this is Debra. When you have a transition, you basically are getting to a stabilization point, which as Bob said.
Okay
We're at a stabilization point, over time, you would expect it to perform basically in line with the industry, offset to the positive potentially as operating initiatives take hold. Directionally, you would expect from here to be the same, again, with some upside as we've discussed before from operating and occupancy improvements over time.
Okay. One last quick one here on life science. We've always talked about hospitals and universities monetizing MOBs. Is there any opportunity to buy life science assets rather than just develop any discussions for universities to monetize their existing life science assets?
The question is about acquisitions of university-based kind of research and innovation life science assets.
Right.
The answer is that was and has been a trend in medical office for several decades, and we are seeing that as well in the universities in the life science space.
Okay. That's it.
Good.
Thank you.
All right. Thank you.
Thank you. Again, ladies and gentlemen, to ask a question, please press star one. Our next question comes from Smedes Rose, Citi. Your line is open.
Hey, it's Michael Bilerman here with Smedes. I don't know if I talk slower, if the noise won't be as bad. I had a couple questions. The first was just on senior housing supply. You talked in your opening comments about how you were pleasantly surprised by the reduction in the growth rate. At the same time, you talk about, and you see what Related Companies doing with Atria Senior Living, launching $3 billion of high-end senior housing. I guess, what gives you confidence that the supply is not going to stop anytime soon, especially with that demographic wave that will come out in the future?
Michael, you snuck in there. We thought this was Smedes.
Yeah.
We'll open and close with the call with Citi, I guess. The question is really about senior housing supply. I think the key data points are around new starts, which are very encouraging in the sense that they are at a five-year low. As we were able to predict years ago, that supply would be coming at this moment. I think based on the data that we now see, one could expect we can predict a big upside as we look at the data sitting here today in the coming years. It is true that there continues to be interest in the assets and interest in developing, as we talked about with the Related high-end urban developments. That continues.
If these trends continue that we are seeing now with starts, we feel very optimistic and upbeat about the supply-demand fundamentals being very much in our favor.
Right. Just a couple of others. Bob, just on the loan portfolio running at about $800 million, is there any maturities that we should be aware of or prepayments that you're aware of as we think about 2019?
Yeah, Michael. We have $300 million, approximately, of loans maturing in 2019, in the back half of 2019. That is all that matures next year. Today, we have 4% of NOI. The implication, obviously, is that we would have a lower percentage now of our loan book as a percent of NOI next year.
As we think about when you do provide guidance, your assumption around that would be that that gets repaid and not replenished, and that capital just goes to repay debt, or you would make an assumption that you would find other loans to invest in?
Yeah. Right now, we're earmarking that, Michael, for reinvestment into the life science development pipeline.
Okay. Actually on the pipeline, from a redevelopment and development standpoint, your gross pipeline right now stands at about $1.73 billion, your share. You recently completed about $200 million of development and redevelopment. How should we think about the tailwind that those investments give you as we go through 2019? Surely not all the assets are going to be stabilized by then. A number of them, a lot of them, are going to start producing income in 2019. How should we think about the yield on that $1 billion of in-process and completed development at your share?
You're right on, Michael. We will start to see, starting in 2019, but really accelerating from there, the income benefit of these developments, in particular in life science, some of which have recently opened. We mentioned, for example, WashU, Penn, to name a few. Those will really start to pick up steam in the back half of 2019 and into 2020. Certainly a tailwind as we come out in February with the puts and takes. That's certainly on the good side. We're excited about that. It really takes off in 2020.
On the redevelopment, it would be helpful, just like you have the dates for the development, this is page 20 in your supplemental. On the redevelopment side, because that's obviously a big chunk, almost half a billion dollars, when those start to become income producing from a date perspective, the same way that you have it on page 21 for the active development pipeline.
Michael, good. If I could just repeat that for everyone's benefit, the idea of including some more completion information for investors and analysts on the redevelopment page in terms of deliveries. I think we can look at that. It's a good suggestion as we provide guidance going forward. I would add, you do have to distinguish between senior housing developments and office developments, because in senior housing, while you're going through the post-opening lease-up period, you actually have some negative EBITDA as you have operating expenses until you get to lease up and break even. It's important if we provide that information, that we also make sure people understand what the different impacts are of the different asset class developments and redevelopments as they start to come online. This is very good input, and we appreciate it.
Right. There's a lot of moving parts as we transition. Clearly, the fourth quarter has a seasonality that Bob talked about on the senior housing side. As you roll into 2019, you have the same store pulling back modestly like it did this year. You have the investments that you're making, which will start to earn income. There's just a lot of pieces to 2019 that need to be taken into consideration.
Yes. Michael is observing, for those of you who can't hear, that there are a lot of moving pieces to 2019, which we've noticed recently, actually, and we'll look forward to enunciating those in February. With that, I really want to certainly reaffirm how confident the team is and how aligned we are about going to get these opportunities. We want to thank everyone for your support and attention, and we'll look forward to talking with you further at Nareit. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.