Good day, ladies and gentlemen, and welcome to Third Quarter 2018 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 be given at that time. 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 Q3 ended September 30, 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 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 company's operations and results is included in the company's annual report on Form 10 ks for the year ended December 31, 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.bentasreit.com. I will now turn the call over to Deborah A. 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 3rd 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. 1st, this quarter and immediately following, we invested approximately $100,000,000 in attractive medical office building and outpatient facilities with 2 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. 2nd, 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 PMV, 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're 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're 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'd 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 submarket. 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 $3,000,000,000 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 1 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'd 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 risk through debt refinancing and maturity extensions. And 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 5 year low. Importantly, in primary markets, net absorption in assisted living in the Q3 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. And 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 efforts 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, and 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 Q3. 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 Q3. In fact, new starts for our portfolio are at the lowest level observed in nearly 5 years.
Annualized new starts for the 1st 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, 3rd 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 3rd 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 Nick. On a year over year basis, the gap in shop occupancy also improved in the 3rd quarter to 60 basis points below Q3 of 2017.
3rd quarter RevPOR growth moderated to 1.8% as new competition drove wider re leasing spreads. Operating expenses grew 3.1% in the 3rd 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 -one percent 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 Q3.
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 3rd quarter as a result of strong lease up activity. The total life science portfolio grew NOI by nearly 23% in the 3rd quarter, fueled by exciting new projects at Wash U, 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% to 4%. Our reliable and valuable medical office business grew same store NOI by 1.1% in the 3rd 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% to 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% to 2.75% growth for the full year 2018. A quick note on the recent hurricanes is appropriate here as their principal impact was on 2 Ventas owned MOBs and 1 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 3rd 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 Brookdale transaction are progressing. We expect the 1st 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 twenty eighteen with operational strategies mitigating LTAC criteria. In health systems, Arden coverage remains strong and steady at 2.9x 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 $300,000,000 in the second half of twenty nineteen, with proceeds earmarked to fund our exciting life science development pipeline. Let's turn to our overall company 3rd quarter financial results. Normalized FFO per share was $0.99 in the 3rd quarter. This result was principally driven by 2 factors. First, the expected receipt of a $0.03 per share fee from Kindred's successful go private transaction in July and second, the dilutive net impact of $1,300,000,000 in disposition and loan repayment proceeds received in the first half of the year and used to reduce debt.
Stepping back since 2,005, we have completed nearly $8,000,000,000 in value creating capital recycling activity. Over that same time period, we've 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 $3,200,000,000 in debt. As a result, we have a strategic asset in our sector leading financial strength and flexibility. Some evidence from the 3rd quarter.
Fixed charge coverage was 4.6 times at quarter end. Our net debt to EBITDA ratio stood at 5.4 times. Less than 12% of our total debt matures in the next 3 years, and we enjoy liquidity of nearly $3,000,000,000 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 3rd 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 $1,300,000,000 in capital recycling and related debt retirement. To close out, the Ventas team is cohesive, determined 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 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 shock guidance for next year. So one of the things you pointed out, this is about 7% of in place inventory under construction primary market.
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 the 12 month trailing that you just mentioned? And 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. It's 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. But there are things we now know standing here today, which include deliveries.
Having seen 3 quarters of the year, we have a pretty good view into delivery levels next year. And our view today is that they're roughly in line with where we're going to see 2018 pan out, so 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. And 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. But again, we want to see the year end, we want to see the rate letters and so on before we give formal guidance.
Okay. And then just with your relationship with Atria, would you will you be investing more capital into that relationship now given their announcement with related or would that remain unchanged?
Hi, this is Debbie Smedes. The deal with related is a really exciting one and has the potential to be $3,000,000,000 of high end urban senior living over time. And we will have the opportunity of course to invest capital in an effectively general partner position in those projects. And then, if there are other opportunities to invest capital in the projects that we see as attractive, those opportunities could manifest for us as well.
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 a flux about converting some of the leases in triple nets to IDEA. Can you confirm if you've been approached and how you're thinking about your exposure? And 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. So 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 there with. 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.
And we will be thoughtful, I think, and have a lot of ways of coming up with optimal changes should we believe they're appropriate.
Great. Thank you. And then just on the seniors housing on the Regia side, going back to that. Can you comment on how new and renewal spreads are trending? And if there's been any expansion between those 2?
Just looking at the sequential same store numbers, it looked like RevPAR did come down despite occupancy picking up. I'm not sure if you could comment on what drove that specifically. I don't know
if that was Eclipse related or not.
Sure, Juan. So I think you're referring to RevPOR, which was 2.1% year over year in the Q2, 1.8% in the Q3. And that is driven by what I call re leasing spreads or new leasing spreads, if you want 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's one of the artifacts of new competition. So that's really what's driving that drift sequentially.
Thank you.
Thank you.
Our next question comes from Michael Carroll of RBC Capital Markets. Your line is open.
Yes, thanks. Bob, the quarterly run rate, FFO run rate has bounced around this year and the guidance is currently implying that there's going to be another drop in the 4th 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. So I think in sum, the question is really to discuss the 4th quarter normalized FFO rate implied in our 2018 guidance.
Right. And just to frame that again, the Q3 FFO was $0.99 that included a $0.03 Kindred fee, which we were very explicit about last quarter. In fact, we received as of this call last quarter, that's in the quarter. When you adjust for that, that's $0.96 As you say, the implied midpoint when we look at the 4th quarter is approximately 0 point 9 $4 What's going on there? The key as we think about and this is a first half to second half conversation, but most now evident in the Q4 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 pre proceeds to retire debt.
And so that now really is complete. It was complete as of the end of Q2. And therefore, we're seeing that run rate impact really manifest in the Q4.
Okay, great. And then last question for 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 has been trending between $300,000,000 to $500,000,000 Will 2019 exceed that pace?
Well, as I mentioned, we're seeing a lot of good projects. The timing, they're large and they're high quality projects with elite institutions, either existing customers or new universities. And the timing is harder to predict with certainty, but I could see that substantially increasing.
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. So I would have thought that the negative impact would have been felt fully in the Q3 and therefore there wouldn't be a further drop from
Q3 to Q4. So can you
just maybe help me understand were all of those really not done by the Q2 or is there something else that's kind of dragging down Q4?
Sure, Steve. The question is why does $96,000,000 go to $94,000,000 3rd quarter to 4th quarter sequentially when adjusted for the Kindred fee? And I would point to seasonality, particularly in SHOP for that difference. That's the key item. The Q4 on a dollars basis is seasonally lowest at that stage and that's really the biggest driver, Steve.
And that really has to do with seniors' behavior moving in and around the holidays and things like that. So that's a typical pattern.
Got it.
Okay. Thank you.
You bet.
You're welcome.
Thank you. And our next question comes from Rich Anderson of Mizuho Securities. Your line is open.
Woo hoo. So if I
could get back to the run rate question, I think Mike asked earlier. So if you take 94 and multiply it by 4, you're 3.76 dollars consensus for next year is $4 I know you're not giving guidance, but 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, but 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. And I'm wondering how you feel about that in context with what the Street is currently thinking about you guys for 2019?
Okay. So I'll try to repeat the question. I think it started with woo hoo. But the question is really around buying senior housing. Is that if I could summarize, Rich?
The noise just went down a little bit. So when you annualize your 94 run rate, you get to a lower number for 2019 versus what the Street is currently expecting. And I'm wondering if perhaps the missing variable is something going on. Is this the time to Ventas to be buying senior housing before the recovery actually starts to take shape?
Well, good question. So 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. So there continues to be a very strong bid in senior housing for the inevitable upturn. And we are continuing to look at investment opportunities that we think are will do something for Ventas strategically, accretively, and so very open to value creating transactions.
And so as always, we'll be opportunistic. And if there's a next big thing, you'll be the first to know.
Okay. And then if I could just get a reconciliation and explanation. Bob, you reiterated the same store guidance of 35 basis points to 1.5%. But if on the back of the supplemental, the range in the more detailed breakout is lower, 0.6% to 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. And if you look at it, the total same store growth is 0.6% to 1.3%. And 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 to 1.5.
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. And if you adjust for that item, it's included in the guidance, but we want to show it with and without that item and that's the difference.
I see. Okay. That's all I needed. Thanks, Bob.
Yes.
Thanks. Thanks. Thanks.
Our next question
comes from Jordan Sadler of KeyBanc Capital Markets. Your line is open.
Thank you. Good morning.
Good morning.
Good morning. It looks like there may be a little bit of an increased appetite for traditional MOBs.
Any insight you could offer there?
And maybe a little bit of a compare contrast on what was sold versus purchased since the end of last quarter?
So the question was really about our investments in outpatient and MOBs. We have built a great business here, which is at 19%, 20% of our portfolio. We like this business. It's been a very steady grower, very reliable. And then I'm going to turn to Pete Bulgarelli, our new leader of the business to talk about what we like about the investments that we make.
Sure. Thanks Debbie. As Debbie said in her opening remarks, we are being very opportunistic and careful with our investments, but these five assets that we 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 Tennant.
They're essentially fully leased and probably 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 the same campus and 5 others are with PMV, our key development partner. And the last piece is that all these transactions were off market and so they're very attractively priced.
Thanks Pete.
Pete, can you just expand on maybe the asset that was sold? I know it was a I think you had a 40% stake in that one, but the cap rate there was a bit higher relative to the going on cap rates on the acquisitions. Can you maybe talk about the quality or the caliber of that asset?
Yes. This is Debbie. Real quickly, Jordan, the question was about a sold asset and that was pursuant to a purchase option.
Okay. Makes sense. Lastly, one more quick one for Bob. Hey, Bob, can you just clarify the re leasing
That's face rent, face value to face value, but it's actuals. So it's not like a street price against which there are significant discounts. It's actuals. So I think it's a pretty clean number.
Okay. Thank
you. Thank you. Our next question comes from John Kim of BMO Capital
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 and L? And I would say the themes again very similar. And if you just look at the Q3 P and 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, but I do expect we'll have some of the continued pressure through releasing spreads through the balance of the year. And then 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. But again, you have to look at that relative to the occupancy line also.
So very thematically similar to the P and L as we look at the Q3.
Thanks for that. And Bob, for this year's guidance, your CapEx to get to FAD is $145,000,000 at the midpoint, but year to date, your FAD CapEx is $79,000,000 Are these 2 comparable figures?
Great question. So we typically the question is the ramp on FAD CapEx in the 4th quarter and is it achievable would be my interpretation of the question because it is a significant ramp. We typically do have seasonally in the 4th quarter a significant increase. That hill decline this year is a bit steeper. So, all else equal, perhaps we have a little bit of opportunity there.
But seasonally, we do expect a significant increase in the 4th.
Okay. And finally, the feedback from the net conference seems to be there's an abundant amount of capital looking 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?
So 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. So you are 100% right with the interest in our verticals.
But 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 are coming that have started in the Q4. So 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.
Yes. Thank you a lot and good morning.
Good morning.
Just a couple of quick ones here. One point of clarification, your supplement shows $1,500,000,000 dispositions year to date, but guidance only assumes $1,300,000,000 Since it doesn't seem to refer to net dispositions, what's the difference there?
Sure. The question is on the SOP, we show $1,500,000,000 of gross dispositions. Our guidance is $1,300,000,000 The difference is our share, Chad, of that. So it's now 100% owned. So that's the net difference.
Okay. And then just looking at your segment guidance, your overall NOI guidance has changed. The shop looks a little bit lower and then non segment is higher. So what's pushing that non segment guidance higher?
Just the question is about our segment guidance, which again we've reconfirmed from the July 27 guidance and Bob can speak specifically if there's anything further you'd like to add.
Yes. What's pushing a 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. So that's the difference. Okay.
All
right. And what assets are in there?
Those that we reported in the supplemental. Sorry, those that have been reported in the supplemental. That's
the impact.
All right, let's move on. So just any update on your selling of Brookdale leased assets? Remember earlier in the year, you had agreed to market up to $30,000,000 of rent?
Yes. 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. And that does represent probably about $30,000,000 in rents. And so 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. So we expect those to happen those sales to happen over time. And as you recall, they would basically be effectively at a 6.25% to Ventas.
All right. Thanks for taking 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.
But the first one, again, is I think Rick and Rob kind of alluded to this earlier on. When people just kind of 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. And you talked a little bit about university MOBs being an area you want to put more money to work in. Just curious, 1, is that somewhere where you can actually grow fairly quickly? Like is there a Wexford type transaction available in that group?
And 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?
So the question really is about the 4th quarter run rate and how that may relate to analyst consensus numbers. I mean, 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. And other than that, I think I would just repeat what Bob said about the Q4 2018 run rate.
Okay. That's helpful. But I guess when we think of the acquisition outlook again on the MOB side, is there something new that could happen outside of the traditional space on this university I'm sorry the University Life Sciences side a la Wexford or 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, I mean,
acquisitions and investments are always
difficult to predict, which is, and they're find that we are able to leverage to find good strategic accretive acquisitions and 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. And so 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, but we are thereby creating a very high quality company, very high quality portfolio and investing in future growth. So 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. And those but 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. And then 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 2Q to 3Q, just trying to understand what that was?
Tayo, we're having some back feedback too. So could you repeat the question please?
Yes. It's one for Bob. The triple net lease rental income, there was a big jump in 3Q versus 3Q for about $23,000,000 I'm just trying to understand what that was? Did you get that?
Kyle, can you hear me? Yes. We had a write off of about $22,000,000 as a result of basically the closure of a JV that we had that had Brookdale The Brookdale lease extension pardon me, the Brookdale lease extension, pardon me, was approximately $21,000,000 that we wrote off in the quarter, Q2 last year or last Q2.
Just last quarter.
We don't have that sequentially. So it's that item.
Okay. So it's just that one item.
Yes. It's at one time.
Is. Right.
That's helpful.
Yes. Yes, yes, remember that. And then just to repeat, that's a non cash item.
Yes. All right. Excellent. Thank you.
Thank you.
Thank
you. Our next question comes from Lukas Hartwich of Green Street Advisors. Your line is open.
Hi, good morning.
Good morning.
So 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?
So let me repeat the question. I think it was about the triple net senior housing portfolio and CapEx expenditures. So most of our leases have minimum CapEx required expenditures, most if not all. And so 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 percent of that portfolio, that does have minimum expenditure requirements.
And 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. And so there are 2 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. And then just another 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, that was 12% growth. And that was really 1st 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, and 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. So strong every which way you look at it.
Thank you.
Thank you.
Thank you.
Our next question comes from Karin Ford of NUSG Securities. Your line is open.
Hi, good morning. Hi, Karin.
Hi. I wanted to ask about the Battery Park
acquisition. What type of
value creation opportunity do you see there? How do you expect the 5% cap rate to trend and would you like additional scale in New York City?
Great. So the question is really about the pending Battery Park asset acquisition. That is a deal that we're excited about. We've been in Manhattan senior living market really since 2011. And we think that the pricing on this asset is well below replacement cost.
So 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, and there are potential redevelopment and licensing opportunities over time that could provide additional opportunities for really great returns. So we have multiple paths to success is what I would conclude.
Great. Thanks for that. And 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? And have you changed your return expectations with the move up in base rates or with your increasing excitement about the University of Life Science investment?
So the question is really on cap rates. I'm sitting across from John Cobb, our Chief Investment Officer, and 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. And in terms of the way we underwrite assets, we obviously are always looking at our cost of capital. We're looking at the growth rate of the asset, the reliability of the expected cash flows. And 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% to 8% or 8.5% range depending on the profile of the asset.
And 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 is with 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. So that's how we're looking at these opportunities. But 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.
So I hope that's responsive, Karen.
Yes, it was. Thank you. Good. Thank you. Thank you.
Our next question comes from Todd Tender 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 4 you acquired was a 5.6%. Does that include any fees you pay PMB? Or 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?
Right. As Pete said, the question is about the yield on the acquired MOBs. And 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.
Okay. And how about same store expectations for these 4? I think Pete may have said their California exposure, maybe Texas, I forget the other states, so maybe a range of NOI expectations.
Again, what we like about the MOBs is the core like returns and the steady returns. And so 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 Bernstein of Capital One. Your line is open.
Hi. How are you doing? Hi, Daniel.
Hi, good morning. I just 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 preliminary outlook includes ESL performance in that?
Yes. So ESL, now I guess 8 months old or so, maybe 10. Continuing to roll out operational initiatives, I'd say, Cai and team are deep into that right now, things like the staffing model and the operating model and really bringing best practice there. So they're on it. Certainly, we've seen some transition impact in terms of NOI that's always expected.
But 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 was just trying to ask also,
are they performing better or worse than the general Ventas previous shop portfolio? I'm just trying to are they do you have positive NOI versus the negative NOI that we're seeing?
Yes. I think again, when you this is Debbie. When you have a transition, you basically are getting to a stabilization point, which as Bob said, we're at a stabilization point. And then over time you would expect it to perform basically in line with the industry, but offset to the positive potentially as operating initiatives take hold. So directionally, you would expect from here to be the same, but again with some upside as we've discussed before from operating and occupancy improvements over time.
Okay. Okay. And one last quick one here on life science. We've always talked about hospitals, universities that are monetizing MODs. Is there any opportunity to buy life science assets rather than just develop any discussions for universities to monetize their existing life science assets?
So the question is about acquisitions of university based kind of research and innovation life science assets. And 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. Okay. That's it. Good.
All
right. Thank you.
Thank you. Our next question comes from Smedes Rose of 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 of questions. The first was just on senior housing supply. And you talked in your opening comments about how you were pleasantly surprised by the reduction in the growth rate.
But at the same time, you talk about and you see what related to doing with Atria launching $3,000,000,000 of the 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 sneeds, but we'll open and close with the call with Citi, I guess. So the question is really about senior housing supply. And I think the key data points are around new starts, which are very encouraging in the sense that they are at a 5 year low. And 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.
So 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 and that continues. But if these trends continue that we are seeing now with starts, then we feel very optimistic and upbeat about the supply demand fundamentals being very much in our favor.
Just a couple of others. Bob, just on the loan portfolio running at about $800,000,000 is there any maturities that we should be aware of or prepayments that you're aware of as we think about 2019?
Yes, Michael. We have $300,000,000 approximately of loans maturing in 2019, in the back half of twenty nineteen. That is all that matures next year. So today, we have 4% of NOI. The implication, obviously, is that we would have a lower percentage now of our loan book in our 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?
Right now, we're earmarking that, Michael, for reinvestment in the life science development pipeline.
Okay. And then actually on the pipeline from a redevelopment and development standpoint, your gross pipeline right now stands at about $1,730,000,000 your share, and you recently completed about $200,000,000 of development and redevelopment. How should we think about the tailwind that those investments give you as we go through 2019? Clearly not all the assets are going to be stabilized by then, but 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, call it, dollars 1,000,000,000 of in process and completed development at your share?
Well, 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, but we mentioned, for example, Wash U, Penn, to name a few, those will really start to pick up steam in the back half of 'nineteen and into 'twenty. So 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, but it really takes off in 2020.
And then on the redevelopment, it would be helpful just if you have the dates for the development, this is Page 20 in your supplemental. Just so on the redevelopment side, when because that's obviously a big chunk, almost $500,000,000 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?
Okay. So Michael, good. So 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 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 and until you get to lease up and breakeven. So 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. But this is very good input and we appreciate it.
Right. There's just there's a lot of moving parts as we transition. Clearly, the Q4 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 needs 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. And with that, I really want to certainly reaffirm how confident the team is and how aligned we are about going to get these opportunities. And 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.