Good day, ladies and gentlemen, and welcome to the Q1 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 follow at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ryan Sheehan, investor relations. You may begin.
Thanks, Sarah. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31st, 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'll now turn the call over to Debra Cafaro, Chairman and CEO of the company.
Thank you, Ryan. Good morning to all of our shareholders and other participants. I want to welcome you to the Ventas first quarter 2018 earnings call. I'm delighted to be joined today by our team to report on our excellent start to the year, highlight our continued progress in executing on our strategic priorities, update you on our mutually beneficial agreement with Brookdale announced today, and discuss our improved 2018 expectations. Our strategic priorities for the year included improving our triple net lease maturity profile, investing in our future growth, appointing a new leader for our high-quality office business, establishing a new senior housing platform, improving our balance sheet, and all the while delivering on our financial commitments. In classic Ventas fashion, I'm delighted to report significant progress against all of these objectives. Let's start with results.
We were pleased to grow normalized FFO per share by 2% to $1.5 this quarter. With our strong start to the year, our full-year expectations for 2018 normalized FFO have increased to $3.99-$4.07 per share. Our diversified portfolio also performed well, with each segment contributing to 2.6% total same-store cash growth. We are really happy with the mix, quality, performance, and resilience of our differentiated portfolio. We also enhanced our financial strength and flexibility during the quarter by extending and staggering our debt maturities and recycling capital to improve our net debt to EBITDA ratio to a strong 5.5 times. We continue to invest in our future growth through development and redevelopment focused on medical office buildings, institutional quality life science and innovation centers, and highly selective senior housing projects. We are seeing good momentum with our life science new development projects.
Our development at Washington University, which is scheduled to open in 2018, now has leasing commitments approaching 90%. Meanwhile, our 3675 Market development at Penn, also expected to open later this year, has commitments for approximately 70% of its available space. Finally, our asset at Duke University, which opened in summer 2017, is expected to be stabilized only one year after opening as a large creditworthy tenant has expanded into most of the remaining available space. Meanwhile, our trophy MOB development in downtown San Francisco, adjacent to the new $2 billion Sutter Hospital building, has now reached approximately 80% pre-leasing, anchored by Sutter Health, a double A-rated health system. The grand opening of our Sutter MOB is expected by early next year. Development and redevelopment of medical office and university-based life science and innovation centers remain our top capital allocation priority.
Turning to senior housing and the significant improvement in our triple net lease maturity profile. I'm very pleased to tell you that we've reached a mutually beneficial deal with Brookdale, a long-standing tenant and the nation's largest senior living operator. We have agreed to combine and extend all of our Brookdale assets into one guaranteed master lease, whose term runs for eight more years through 12/31/2025, when the senior population will be extremely robust. To give Brookdale support and stability while it executes its operational turnaround under its new team, we've provided an average of $6 million in annual rent credits to Brookdale in each of the remaining years of the lease, which provides even greater reliability for our future cash flows. We've also agreed on a straightforward, objective change-of-control standard for Brookdale, balanced with significant credit and other enhancements for us if a change of control does occur.
The agreement includes the ability to sell up to 15% of the Brookdale assets to improve portfolio quality, reduce leased assets at Brookdale, and further diversify the Ventas portfolio. We continue to find innovative ways to optimize our portfolio, invest in significant operator relationships, and advance the interests of Ventas shareholders. We support the efforts of Brookdale's new leadership team to drive operating performance in our portfolio and across the company, and commend them for acting decisively to move Brookdale forward. With the completion of our Brookdale agreement, we have less than $2 million per year of triple-net senior housing rent that matures through the end of 2020, and our total triple-net weighted average lease maturity is extended to 10 years. Moving on to our newest winning platform, ESL, led by Kai Hsiao and his experienced team of senior living executives.
Partnering with ESL has given us important strategic and operational flexibility in senior housing, because high-quality management teams are the scarcest asset in our business. We successfully transitioned a portfolio of 76 Ventas-owned senior living communities to ESL in January, and both ESL and the portfolio are off to a strong start. ESL has a fully staffed team, and it has already become a sought-after manager in the senior living business. The portfolio has begun to show good signs of operational upside, including sequential improvement in occupancy. With the transition behind us, we believe we will derive good risk-adjusted return and growing cash flow from this portfolio. As we come upon our 20th anniversary at Ventas, we are proud of our accomplishments, and we remain driven for more. Despite the challenges in the REIT market today, we remain bullish on our industry, our enterprise, and our future.
As I look across the entire equity market, I can't think of where else you can invest in an S&P 500 stock with a rock-solid 6.5% dividend yield, triple B-plus balance sheet, a compelling demand story, a dynamic, fragmented, and large investable market, and an experienced, excellent team that has a long record of extraordinary value creation, innovation, and results. Before Bob begins his remarks, I want to officially welcome our new colleague, Pete Bulgarelli, to his first earnings call at Ventas. Pete joined the team in April as the leader of our highly valuable, integrated, 25-million-square-foot ambulatory, MOB, and university-based life science business. Pete has a long and exceptional record of accomplishment in real estate, most recently focused on healthcare, life sciences, and higher education, including academic medical centers.
We know Pete will bring high energy and great experience that will take our office business to the next level of success and performance. Now, I'm happy to turn the call over to our CFO, Bob Probst.
Thanks, Debbie. I'm happy to report a strong start to the year from our high-quality portfolio of healthcare, seniors housing, and office properties. Our total property portfolio delivered same-store cash NOI growth of 2.6% in the first quarter, ahead of our expectations, with all segments contributing to growth. Let me detail our first quarter performance and 2018 guidance for our segments, starting with SHOP. Our SHOP business came out of the gate strong, with cash NOI growth versus prior year of 0.7%, ahead of our full-year expectations. As expected, first quarter same-store revenue grew nearly 1%. Occupancy exceeded our expectations at 87.4%, or up 160 basis points below Q1 of 2017. A severe flu season did have an impact on move-in activity in the first quarter. This impact was mitigated by move-outs, which were better than both expectations and prior levels.
Less new competition opening its doors in the first quarter also supported occupancy and continues a trend of delays in new openings. Q1 RevPAR growth was 2.7%. Though win placement increases were strong, RevPAR growth was muted by price competition in supply-challenged markets. Meanwhile, operating expenses grew in line with revenues in the first quarter at nearly 1%. Our operators did a terrific job managing staffing levels in the quarter, and expenses also benefited by 50 basis points from a favorable insurance true-up in the quarter. At a market level, we continue to see NOI growth in our traditional strongholds, including Los Angeles, San Francisco, Boston, and Ontario. This strength was mitigated by NOI declines in markets affected by new competition, most notably Atlanta, Dallas, Chicago, and a number of secondary markets.
On a positive note, we continue to see fewer new construction starts in our trade areas, with a 50% sequential decline in Q1 starts versus the fourth quarter of 2017. In fact, the first quarter 2018 represents the lowest level of new construction starts in our markets since 2014. However, the recent trend of delayed new deliveries of construction already underway increased the construction to inventory percentage in our trade areas by 10 basis points. Despite the strong start to the year, at this stage, we are maintaining our full-year same store NOI guidance of -1% to -4%, though with updated assumptions. Our guidance now assumes an improved full-year occupancy gap below prior year in the range of 150 to 200 basis points, while RevPAR is now anticipated to grow between 2% and 3%.
The full-year NOI guidance range is a function of the pacing of new deliveries and resulting revenue impacts. ESL, our new seniors housing operating partner, is now reflected in our Q1 SHOP supplemental reporting. We are pleased to welcome Kai and the ESL team to our high-quality SHOP business. ESL has certainly hit the ground running, growing occupancy in the portfolio by over 100 basis points since transition. Moving on to our triple net segment. Our triple net portfolio grew same-store cash NOI by an outstanding 4.4% for the first quarter, driven by base rent escalations. Trailing 12-month EBITDAARM cash flow coverage in our overall stabilized triple net lease portfolio for the fourth quarter of 2017, the latest available information, remains stable with prior quarter at 1.6 times. TTM coverage in our triple net same store seniors housing portfolio also held steady at 1.2 times.
Please note that our supplemental reports rent coverage on a TTM basis. Hence, the current reporting does not include the beneficial impact to coverage of the Brookdale agreement. In our same store IRF and LTAC portfolio, TTM cash flow coverage was 1.5 times, down 10 basis points sequentially as a result of the impact of the LTAC reimbursement change. With recent positive LTAC reimbursement news and continued operational strategies taking hold, we expect our LTACs to generate improving results in 2018. Our skilled nursing assets, principally operated by Genesis, now represent just $20 million of annual rent or 1% of Ventas' NOI. The SNFs held coverage at 1.5 times in the quarter but continued to experience industry headwinds on the top and bottom line, trends which we expect to continue.
Ardent delivered terrific results in 2017, leading the pack across top and bottom-line metrics and enabling strong and stable rent coverage of 3 times. In 2018, Ardent is focused on integrating the East Texas Medical Center and Topeka acquisitions, rolling out a new IT system across its platform, refinancing its debt structure, and driving results. We are also encouraged by CMS' better-than-expected 2019 proposed rate of 3.4% for hospitals. For the full year 2018, we forecast that our triple net portfolio will grow same store cash NOI between 2% and 3%, with in-place lease escalations partially offset by the 80 basis point cash impact of the Brookdale lease extension, which is now fully incorporated in our guidance. Rounding out the portfolio review is our attractive office reporting segment, which now represents 25% of our NOI and delivered healthy same store cash NOI growth of 2.2% in the first quarter.
Let me break out these results between our university-based life science and medical office portfolios. Our exciting life science business grew Q1 same store cash NOI by 3.1%, driven by occupancy increasing by 70 basis points to an outstanding 97.3%. For the full year 2018, we continue to expect robust life science same-store NOI growth in the range of 3%-4%. Turning to our medical office business, MOB same-store NOI grew 2% in the first quarter. Our team did an excellent job managing occupancy, with tenant retention above 85% in the first quarter. Revenue also benefited from in-place lease escalations that exceeded 2.5%. We continue to forecast 1.5%-2.5% growth from our strong and steady same-store medical office portfolio in 2018.
On a combined basis, we expect our office portfolio of life science and MOB assets to grow 2018 same-store cash NOI in the range of 1.75%-2.75%. On to our overall company financial results and our updated 2018 guidance. Normalized FFO per share in the first quarter grew 2% to $1.5 as a result of total portfolio same-store growth of 2.6%, in addition to accretive acquisitions and profits from beneficial transactions. Income from continuing operations per share was below prior year, driven by an impairment of our equity in an unconsolidated joint venture holding SNFs that we expect to sell in 2018 at a 9% cap rate on cash rent, and deal costs related to the ESL transition. Dispositions and receipt of final repayments on loans receivable totaled $300 million in proceeds in the first quarter of 2018.
Proceeds from these dispositions were used to retire debt, resulting in an improvement in our net debt-to-EBITDA ratio by 0.2 times to a healthy 5.5 times. We also had strong execution in the capital markets and extended and staggered our maturity profile in February through the successful issuance of $650 million of 4% 10-year senior notes in order to retire $700 million of maturing 2% notes. In addition, we took refinancing risk off the table by tendering and retiring $600 million of 4% senior notes due 2019. Let's close out with our updated 2018 guidance for the company. We're excited at this early stage in the year to improve our full-year outlook for normalized FFO for a fully diluted share to now range between $3.99 and $4.07.
This guidance represents both a narrowing of the guidance range, as well as a $0.03 increase at the midpoint compared to our previous guidance. Our increased expectations are driven by our strong start to the year, the resilience of our cash flows, and the progress against our key initiatives. Notable guidance assumptions include the revised expectation for $1.25 billion in proceeds from asset dispositions and loan repayments at a GAAP rate of over 8%, the proceeds of which will principally be used to retire debt. Our guidance assumes 100% ownership by Ventas of the assets managed by ESL, the sale of our minority shareholding in the SNF JV, and the impacts of the Brookdale agreement, including a one-time non-cash charge of $22 million.
For the full year, we are updating our total portfolio same store cash NOI growth guidance to now range from 0.5%-1.5%, with our SHOP and office same store guidance unchanged and the triple net outlook revised to include the impact of the Brookdale lease extension. To close, the Ventas team is very pleased with our strong start to the year and is committed to execute with excellence against our strategic initiatives in 2018. With that, I will hand it to the operator to open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Juan Sanabria with Bank of America. Your line is now open.
Hi. Thanks for the time.
Good morning
Brookdale lease. Good morning. Just on the Brookdale lease, I was hoping you could walk us through the impact to the EBITDA coverage ratio, kind of pre and post, and what you expect that to go to if you're able to execute on the targeted asset sales.
Thank you. We are pleased to announce the Brookdale deal today. It is, I think, a really creative deal that is good for both parties, just the way we like to do our deals. The rent credit, the cash rent credit is a fairly small amount, as you can see, and therefore it would have minimal but positive impact on the EBITDA coverage under the leases.
Okay. Is there any material impact from the potential asset sales? I'm just trying to get a sense of why you think that this is a good long-term sustainable number, because it looks like the EBITDA coverage is still kind of at or below one times.
Well, the purpose of the deal, Juan, is to give us really a good bridge to a much longer lease term with enhanced credit protection while we contribute and support Brookdale's operational turnaround. Our expectation is with eight more years from now on the lease, substantial credit protections in the meanwhile, the Brookdale team focused on operating turnarounds, and the silver wave that we know is coming, that over time, this will be an excellent lease for us and one that we feel really great about. It gives great visibility to our cash flows going forward, we're very happy about that.
Thanks. Just to follow up on Eclipse. You decided to keep, it looks like, 100% of those assets rather than sell a minority piece. What drove that decision? Was it in any way related to pricing? Just if you could comment on the mechanics of the operator transition. It seems like you've gained occupancy, any headwinds you see from here going forward as that transition is buckled down?
Well, what I can tell you is that we are really happy to have a successful transition behind us. We think the team is aligned and doing great. We're happy to own the portfolio. We know it is a very valuable portfolio, we will continue to evaluate our options. We did take it out of guidance, as you've correctly pointed out, as we reevaluate our options on the portfolio. Right now, we like the upside and are feeling good about our decision to move it.
Thank you.
Thank you.
Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Your line is now open.
Yeah, thanks. Just kind of off of Juan's question related to Eclipse. Debbie, can you kind of describe the upside that you see in that portfolio? Is that something that the new team can kind of streamline operations, or do we have to wait for better demographics to kind of impact those results?
Okay. Thank you. The occupancy is probably the biggest upside that we see, that's been trending positively since the transition. The portfolio is really segmented. There's a very large component of sort of stable growing cash flows, and then there's a component where we really think that specialized operating plans can improve performance. There's a very targeted plan, asset by asset, that we see starting to gain traction and that we hope will deliver improved cash flows over time.
Okay, great. Can you provide some color on the potential asset sales out of the Brookdale lease portfolio? Have those properties already been identified, and have you agreed to sell those specific properties with Brookdale, or are you still kind of doing your work and doing your research to figure out which assets you want to get rid of?
Well, as you can imagine, my colleague John Cobb and a number of our other Ventas colleagues have been working with Brookdale for quite a while on the outlines and completion of this agreement. We have jointly identified really a pool of assets that we think would be a good group of assets to sell that would improve the portfolio performance and quality. The final details are yet to be determined, we think there is directional agreement around a group of assets that would be targeted for potential disposition.
I'm assuming these assets have lower coverage metrics.
Remember that within a master lease, coverage is somewhat artificial. It really just depends on how you allocate rent within the lease. The real idea is to identify assets where you believe that the future operating performance may not be as good as the assets that you're not selling. It's really about the operational future of the asset. It's not about coverage, which is, as I said, a somewhat artificial allocation within a master lease. That's how to think about it. Which assets are not strategic to the portfolio? Which assets do we think have a better upward trajectory in terms of performance? Segmenting out the ones that we think are either non-strategic for one reason or another or could be operated better by someone else, that type of thing.
Great. Thank you.
Thank you, Michael.
Thank you. Our next question comes from Smedes Rose with Citi. Your line is now open.
Hi, thanks. I just maybe wanted to turn to SHOP for a moment. You noted that your first quarter results were better relative to expectations, but the full-year outlook is unchanged. I'm just wondering, are you more comfortable at the higher end of that range, and do you still hear from your operators that full-year occupancy would be impacted by the more intense flu season, or has your thinking around that changed at all?
Hi, Smedes. Thanks for the question. We certainly are pleased with the start, growing 0.7% in the first quarter. Always good to come out of the gate strong, and that's indeed what we did. One of the things that benefited the quarter I mentioned was the reduced number of new openings in the quarter, and we've seen this trend of delayed new openings for the last several quarters now. Our outlook is really assuming that those are going to open in the balance of the year. We're going to see an increase in new units coming online and a consequent impact on the P&L. A good start to the year, but obviously still early. On that assumption, we're keeping the range.
All right. Thank you.
Thank you.
Our next question comes from Nick Yulico with UBS. Your line is now open.
Hi, good morning. This is Trent Trujillo on with Nick. Wanted to circle back on Eclipse, potentially for clarification here. What was embedded in guidance in terms of how much of the portfolio you were going to keep versus potentially JV? Wanted to get some clarification since now you're retaining 100% and maybe that had an impact on FFO.
Sure. The guidance assumption in February was that we would sell approximately 25% into the JV, and it would not be consolidated into our results. You'll see consequent financial impacts in our guidance through the P&L of the decision to keep 100% in the guidance, and therefore, we see a consolidated P&L coming through. That's the real change in guidance. The impact on FFO is really de minimis.
Okay. Thank you. Again, wanted to clarify, what is the latest standing on the LHP loan? I think that was prepayable starting March. Are there any discussions on that front?
In our guide, we've consistently projected for the year and continued as that In and around mid-year, the LHP loan would be refinanced as Ardent continues to do well and wants to consolidate its capital structure into a more streamlined way. That's our expectation, but it will obviously be driven by market conditions.
Okay, thank you very much.
You're welcome.
Our next question comes from Richard Anderson with Mizuho Securities. Your line's now open.
Thank you and good morning.
Good morning.
If I could just kind of get a little bit into the Brookdale rent issue. I think if I'm reading this right, you start off with at $8 million of a rent concession this year, and it trickles down to $5 million in 2025, and there's a process that gets you there. If I'm adding it up right, it's $48 million of rent cuts collectively over eight years. Is it appropriate to say that, well, you maybe aren't resolving the coverage issue all at once, but you're doing it gradually over time, and then once the, as you call, the silver wave hits in 2025, hopefully, you have achieved the goal of appropriate coverage or even better coverage by that time. Is that a good way to think about it?
It is a good way to think about it. Again, we're trying to create a mutually beneficial agreement where we can support the efforts of the team to drive operational improvement. We have always said that the best thing that Brookdale can do to create shareholder value is to drive operations. We are supportive of that effort, and that's why you see the pattern of the rent credits over time, as you correctly point out, and it's all about improving the EBITDAR of the portfolio.
Yep. Okay. On the topic of change of control, Brookdale says that you have relinquished your consent rights, at least to some degree. Can you give a little bit more color on how that has changed for Ventas as a consequence of this negotiation?
Yes. We have basically modified our change of control rights so that it has become a more streamlined and objective change of control that protects Ventas and Ventas shareholders from the credit side, from the reputational side and operational side. Because we have always cared deeply about who takes care of these 100,000 seniors and their financial wherewithal to do so. Importantly, in that situation, that gives Brookdale some strategic flexibility. In that event, we also get some significant enhancements, including lease extensions, if a change of control does occur, as I mentioned at the outset.
If you don't like that someone comes in and replaces them, what is your possible response to that?
Well, I don't think liking has much to do with it. It really is an objective view. Is this a company, a firm who has significant credit behind its obligations to care for seniors? Is it a company or a firm who has operational experience in senior living? Is it someone who reputationally should be in a position to do the things that Brookdale does, i.e. care for seniors and that's very important to us, always has been.
Right.
that is objective. Yes
if some of those boxes are not checked, you can have a voice.
Right. Like if you took over.
You kidding me? Last question on the guidance. Isn't it mainly an accounting issue, really? Now, I guess the Brookdale rent can no longer be straight line with the inclusion of the CPI element. I assume that's correct. Am I thinking about the guidance correctly that you're just basically-
Well, Yeah.
Go ahead.
Let's simplify it for you, which what's really good about it is that before we did this deal, our cash rent was higher than our GAAP rent. By doing this lease extension for eight years, GAAP and cash are approximately the same.
Right.
I think of it more aligning GAAP and cash, and we like that.
Yep. Fair enough. Okay. Thanks very much.
Thank you.
Thank you. Our next question comes from Michael Knott with Green Street Advisors. Your line is now open.
Hey, everybody. On the Brookdale front, just curious, Debbie, how you thought about sort of on one hand, the full recommitment to Brookdale and that entire portfolio versus maybe operator transitions, maybe to ESL, and maybe even SHOP conversions as opposed to strictly keeping it triple net lease?
Well, thank you. Bob's feeling like the Maytag repairman here so I'll be happy to answer that, and then we'll move on. Look, as I said, we want to be a good partner. We want to support Brookdale. We believe this is an excellent outcome for Ventas shareholders, and we have retained certain flexibility in certain cases to continue to have optionality, including some asset transitions in certain circumstances.
Okay. Maybe on the SHOP side, you continue to cite sort of the bifurcation in performance between high-barrier and low-barrier markets. I'm just curious if that start to the year, comparing those two sides, was that about as you expected, or did one side do better or worse than sort of what you had built into your guidance?
Thank you for taking care of my partner Bob here with that question.
Yes. Thank you.
We appreciate it.
Look, I called the stronghold markets in the prepared remarks, the L.A.s, Bostons, continue to perform very well. We've seen that literally over the course of the years. That's both on top and bottom line, good pricing power, good occupancy, good bottom-line momentum. The challenge markets from a supply perspective also are a very common theme, Atlanta, Chicago, et cetera. The performance of those, again, roughly as expected. No surprises really, I think from that perspective. What is unique, and I highlight is, the delay in new openings, which is obviously helpful to give time for absorption to occur. Also very notable to us is the decline in new starts, which is encouraging for the future, of course. The profile generally by market hasn't really changed materially.
Okay. Thank you.
Thank you.
Our next question comes from Jordan Sadler with KeyBanc Capital. Your line is now open.
Hi. I apologize in advance. I have one more Brookdale question for you, Debbie. Good morning.
Good morning.
Regarding their rights under the timing of the sales, I guess I'm trying to figure, there's potentially $30 million of additional rent concession or credit depending on how much you sell-
No.
Sorry.
No.
There's a $30 million.
No
credit potentially. You want to go through that?
No. Okay. Let's say the portfolio has rough numbers in the 170s of annual rent. About 15% of that could be sold. We get all the proceeds from that, and depending on what the proceeds are, we give a credit to Brookdale at a six and a quarter yield, basically.
Is that up to a maximum credit of $30 million? Is that how we should think about it?
The 30 is somewhat irrelevant to the second part of the calculation, Jordan.
Okay.
So all the-
If you sell
Think about it. Let me try it a different way. Think about it this way. All the rent basically that's now there would stay on the portfolio minus net proceeds to Ventas times 6.25%. Maybe that clarifies it a little.
Got it. You could sell $500 million of Brookdale assets and give them a 6.25% credit on that, theoretically.
Yes. It all turns on proceeds.
Got it.
Got it.
I guess my question surrounding those sales, which was really the heart of my question, not the 30, but do they have any rights in terms of termination of those leasehold interests? Or do you have full control over timing and when those leases will terminate and assets will sell?
Well, again, given the fact that we think that these potential sales improve the portfolio, help Ventas, help Brookdale, and are very positive for both companies, we would encourage that process to happen over the next year or two, and obviously subject to market conditions. Again, think of the theory is we would be getting money that we could reinvest into life science, medical office development and redevelopment, and basically redeploy those proceeds. That's really how to think about it.
Okay. They can't terminate. Can they terminate those leases at their option?
Well, it's a full-scale sale. The idea is there would be no lease at that point in time. There would be a new buyer, be it any person who wanted to buy senior housing, and they could have the benefit of operating that asset, which we think would enhance proceeds.
Okay. I get it.
It's just the sale of the asset to a third party, which again.
No, I understand. Let's say you guys were dragging your feet in terms of the sale process and how long it was taking, or at least they may have thought you were dragging your feet, do they have any rights or control to accelerate that sale?
Yeah. We've worked out something where we think the asset sales are good for both sides, and that we would work cooperatively together on a commercially reasonable timeframe to identify the assets for sale and sell them in the optimal way to the best buyers.
Okay. That's helpful.
Good
The other one I had for Bob is on the skilled nursing joint venture sale. Can you shed a little bit of light on that?
Sure.
Maybe your stake. You said a nine cap. I just wasn't sure who it is, what it is.
Sure. It's an old joint venture, small, within which there are about 13 SNF assets. We have decided to sell those assets, and as a consequence, therefore, that's the impairment that I mentioned in the first quarter that we recognized. We'll be selling those assets effectively at a nine cap rate on cash rent. Small deal, ultimately. Cash proceeds of, call it, $80 million our share gross. Another exit, if you like, of the SNF business for us at an attractive price.
Yeah. We're a quarter of the joint venture. We're selling our quarter interest.
Your share would be $80 million gross-
Right
of proceeds. Got it.
Good. Yep, exactly.
Thank you.
Thank you.
Thank you, guys.
Our next question comes from Chad Vanacore with Stifel. Your line is now open.
Hi, good morning, Debbie and Bob.
Morning.
Good morning.
All right. I just want to get a little more detail on the two Brookdale leases. You mentioned objective metrics on change of control. What are some of those key thresholds on the objective side that have to be met in order to have this change of control?
All right. Thanks for the question. Again, let me just recap for everyone. There are objective standards for a change of control. If a change of control occurs, Ventas will receive additional protections and enhancements, including lease extensions out to 2029, as well as commitments to CapEx and fees. In order to do that, we have provided basically three general objective standards. One is financial wherewithal of the buyer, one is reputational, and one is really operational experience in the asset classes. I'm oversimplifying, obviously, but those are the objective standards, principally, through which a change of control would be considered.
Okay. Is there a threshold on the financial covenant?
Yes. There's significant net worth and leverage requirements.
Thanks. All right. Then you referenced additional CapEx commitment for Brookdale and possibly Ventas. What are those commitments now amongst the parties, and where do they go to under the new lease?
Right. Brookdale, as the triple-net tenant, is responsible for ongoing maintenance, CapEx. Then, as we said in the press release, Ventas will work with Brookdale to consider whether it's appropriate to invest additional capital to improve the market positioning and performance of the assets. We would work with them, and if we agree, there would be a market return based on the capital invested, which, of course, again, would, by definition, improve the quality and hopefully the performance of those communities.
What's the minimum CapEx requirement per year under the new lease?
If memory serves, it's about $1,000 a unit a year.
Okay, that's great. Then you just mentioned some additional credit protections in the Brookdale lease. What are you referencing there?
Well, we have tangible net worth and leverage-type requirements, very typical credit-type requirements to know that, as I said before, A, that the operator is financially creditworthy to conduct the business that it's in.
Which is basically taking care of seniors. Those requirements are enhanced if there is a change of control.
Okay. That is all. Excellent. Thanks for taking the questions.
Thank you. I hope that was helpful.
Our next question comes from John Kim with BMO Capital Markets. Your line is now open.
Thank you. QCP has put itself up for sale, and they seem open to competing bids. I'm just wondering, would a transaction like that, where you have skilled nursing but a different, higher-quality operator, be of any interest to you?
I'm not sure it passes the SNF test, John.
It looks like a SNF.
That's something that you probably should take up with the parties who are involved in the transaction.
Would that be interesting to you, or no?
We are really focused on executing our plan, which is, as we've talked about, really investing in our future growth through our life science and MOB developments and redevelopments, and working with our operators to really drive performance and delivering results for our shareholders.
On the supplements, probably a question for Bob. All of your metrics exclude assets held for disposition, and I'm wondering how big that portfolio is and if that's equivalent to the $62 million assets held for sale.
Good question.
Yeah. The held-for-sale assets are most materially in there are now the SNF assets I talked about those 13. Outside of that, there is a dozen or so of intended for sale. It's a very small proportion of the overall, call it 1,200 properties.
Some of the REITs within the sector and outside of healthcare are planning to expense internal acquisition and leasing costs in G&A. I'm wondering if you're doing that currently or plan to do it in 2019.
That's a great question, and part and parcel of the leasing standard, which we're working on right now, along with everyone else, for implementation next year. We'll see how that goes. One of the tenets of that is potentially having to expense those leasing costs. We're working through that right now, and obviously, we'll report back as we know more.
Thank you.
Thank you.
Our next question comes from Omotayo Okusanya with Jefferies. Your line is now open.
Hi. Yes. Good morning, everyone. It was nice to see these results this morning.
Thank you.
My question is, I am looking at the sub Page eight that has your triple net lease portfolio, the breakout lease segmentation by cash flow coverage, and I'm comparing it against last quarter's sub.
Right.
Trying to look for the big change that reflects Brookdale. If I'm reading this correctly, it seems like Brookdale moved somewhere from 1.2 to 1.3 EBITDARM coverage last quarter to somewhere between 1.1 and 1.2 this quarter. Is that correct?
Yes. Well spotted, and speaks to our disclosure. The 1.1-1.2 bucket, which you see at 8.9%, does include Brookdale, as you would imagine, as the biggest piece of triple net senior housing. That did move relative to last quarter. Again, this is all TTM.
Yep.
2012. It doesn't reflect any of the agreement we've been talking about today, on the old agreement, that's the math.
That's the math. Okay. Now that I have that correct, on the old agreement, coverage kind of slipped down a little bit. It's an EBITDARM number. If you adjust that number for about five, six basis points to show EBITDA, you're still somewhere around 1.1 to 1.15 on Brookdale. Going back to Juan's question, why only a $6 million credit? Why do you feel that was enough to feel confident about the sustainability of the coverage?
Well, it's back to me, I guess. Again, what we're doing here is to extend the lease maturity out for eight years. We are giving some near-term cash flow support to the new Brookdale team, who is focused on driving operational improvement. We received significant credit enhancement that will support the reliability of the future rent streams. Importantly, we are bridging to really 2026, when we are quite confident that the silver wave, as Brookdale calls it, will be in full force, and hopefully customers of all of our senior living communities. Really think about it as this lease extension, credit, operating improvement, and bridging to a period of time where the senior population will be very robust, and the demand will be extremely great.
In the meanwhile, again, we have the credit support from Brookdale to carry forward, which, as I said, improves the visibility and resilience of our future cash flows.
Gotcha. I think most of us get the logic. I guess we're all just struggling with, is this $6 million today, and then 12 months from now, we get another press release saying, well, fundamentals deteriorated even further because of supply, we have to give them another $6 million? I just don't think people want us to kind of go through that death march of two or three cuts, rather than just kind of take the pain today, and we're done with it. I think we're just looking for some comfort that that $6 million is it type of thing.
Well, we feel really great about where we are. We believe the Brookdale team is very focused on improving operations, which is really the key to everything. We are on an upward trajectory that extended our leases for eight years, which people should feel really great about.
Okay. That's helpful.
At the same time, again, we believe we're helping Brookdale too succeed.
Yep. The assets that are targeted for sale, could you give us any indication of what rent coverage on that targeted pool is?
Right. As we talked about before, when you have a master lease, the coverage is based on what we write in the schedule of the asset-by-asset coverage. It should be relatively consistent across the portfolio with the lease extension. The focus of the sale of assets for both of us is really to focus on assets that are non-strategic. Maybe there's one in the market. Maybe someone else, a local operator, can do better. Maybe we think that the asset doesn't have as good of a future growth profile as the assets that we're retaining. It has nothing to do with coverage, which basically will be consistent across the board by asset as we do the lease extension, but it will have everything to do with our expectations of future performance of the asset.
Again, the goal being to improve the quality and future performance of the retained assets by pruning.
Got you. Okay. That's helpful.
I hope that's helpful. Good.
Yes, ma'am.
Thanks, Omotayo. We appreciate the question and your support.
You got it. Thank you. One more just quick one for Bob, if you don't mind. Just again, the SHOP portfolio, again, really good performance in one Q. Could you just remind us again, why you've decided to just keep guidance where it is right now? What are you still looking for before you get more confident about possibly raising SHOP guidance?
Sure. Well, one quarter does not a year make, clearly.
Yeah.
We'd like to get some more experience under our belt, frankly. The range is really driven by the pacing of occupancy or pacing of new deliveries and the consequent impact on revenue. That's what we want to see unfold here over the next quarter or so to really get a better handle on the full year.
Again.
Got you.
It's a good start to the year, and we're happy about that.
Yep. Great start. We'll take it.
All right. Good quarter.
Thank you.
Thank you.
Our next question comes from Daniel Bernstein with Capital One. Your line is now open.
Hi, good morning.
Morning.
Good morning.
Hi. I want to actually turn towards development, which is the first comments that you made, almost the first comments you made in your opening remarks about the focus of your capital allocation. If you could talk about the opportunities to increase development and perhaps redevelopment within your portfolio. Do you think that's going to continue to increase as a percentage of the portfolio? Do you see an increase of operators coming to you for development funding, particularly in seniors housing, given that the slowing of starts, and I think there's some more limited funding within the seniors housing space. I'm just trying to understand the opportunity you see in development.
Well, development is clearly a number 1 focus area for us from a capital allocation perspective, and most notably within that, life science. We've been sharing along the way over the last year or so the progress there, and we highlighted a few new tidbits today in that WashU and at Penn, which is really exciting. We continue to see a robust pipeline of opportunity there with really good risk-adjusted returns and have grown that business even ahead of our high expectations since we bought it several years ago. We continue to focus on that and see further opportunity. Other trophy assets for development, clearly, we continue to pursue. We talk about the Sutter MOB in San Francisco opening early next year, now approximately 80% pre-leased. Super excited about that.
Selective opportunities in senior housing in high barrier markets with operators like Sunrise, we'll continue to pursue. Again, very selective trophy-type assets. It's really about life science for us as we think about development.
Okay. Could that dollar number, which is almost like $650 million now, could that track closer to $1 billion, or should we think about the development staying around this level?
Yeah, this is John Cobb. I could see that definitely getting there. I think we have some really good partners with Wexford on the life science side, PMB, and others on the medical office side. We're seeing some good traction recently. We do see, because of our reputation and their skill set, we see a lot of great, really good risk-adjusted, high-quality, like Bob said, trophy assets in some really great markets in California. It's a really good pipeline.
Importantly, with really well-rated, highly regarded institutions-
Very-
Like Penn, like WashU, like Sutter. These are where we're focused, and the demand for the product, as John said, that PMB, Wexford, and others can deliver, is very high.
Really good pre-leasing, as you just saw earlier. We're signing up pre-leasing before we start development, and by the time we're opening them, you're seeing some really good traction, even during the development period.
Okay. If you look at the yields you're getting on some of these investment-grade credits versus their bond yields, and this is kind of what came up with the QCP deal yesterday, do you think cap rates on some of these assets should be a lot lower over time? If the investment-grade hospital credits bonds are 4% or below and you're getting 7%, 8%, is that the rationale for doing more Wexford assets?
You're making a very good point. I'd like to comment in a couple ways. One is that whether it's highly rated health systems or highly rated universities, both of which our new partner, Pete, has a lot of experience in, we see that they have a very robust mission. They want to accomplish a lot of things. They're in a hurry to do it. Even they, the AA-rated, the highly well-capitalized organizations, they still have more uses than sources.
Where we come in and where we have really moved our business is to be able to provide those additional sources in the academic medical centers, in the life science business, in the MOBs, with these highly rated organizations, with brand names. They are willing to use our capital in these assets and devote the rest of their capital to academic programming in the case of the universities and things like that. This is a very good way to rotate our capital, which in the healthcare REIT business has historically been around, gosh, the REITs have a lower cost of capital. We're going to provide it to people who have a higher cost of capital. This is actually a beautiful inverse of that, where we are getting great risk-adjusted returns from really highly rated, well-capitalized companies.
As you've seen over the past years, we have significantly rotated our capital allocation in that direction. As we've said, it's our number one capital allocation priority for that reason, among others. It's a very interesting concept. I'm glad you raised it, and it's one where we think we've already created a huge amount of value in the $2 billion portfolio we've built in life science, where we think we're in at about six and three-quarters, and we see assets trading at five or below. That's a big amount of value creation for Ventas shareholders, and we will keep plowing that field as long as we can.
Sounds good. I'll hop off. Thank you.
We have a follow-up question coming from Smedes Rose with Citi. Your line is now open.
Hey, it's Michael Bilerman. Debra-
Hi, Michael.
Hey. I just wanted to go back to the ManorCare transaction, more so not relative to any Ventas interest, but more so your views about the changing landscape. Clearly ProMedica and Welltower are trying to make the view that this is not a skilled nursing deal, this is a health system that's coming in and trying to reinvent the skilled nursing space. Do you sort of subscribe to that view? Can you see how something like that could be successful over time, and then maybe at some point down the road, Ventas may be more interested in getting back into the sector?
Well, Michael, thanks for the question. The one thing I would say is that we've talked about healthcare and senior living being a really large, fragmented, dynamic space, you're really starting to see a lot of horizontal merger activity for a long time, and now you're really starting to see a lot of vertical integration, what we called convergence at one point, across asset types. If you recall, when we first became a partner of Ardent, we talked at great length about how these asset types are converging, whether it's hospitals with outpatient or post-acute, et cetera. We really are seeing an acceleration in the dynamism all across healthcare, and that is exciting, and it's a place where we feel exceptionally well-positioned to play and to help all these organizations achieve their goals but also do great for Ventas shareholders.
There are lots of ways to play. We think we're right in the heart of it all, and I think there's lots of opportunities for us to continue to move the business forward within the dynamism that we see across the landscape of healthcare and senior housing.
Specifically on integrating skilled nursing into a larger health system, Ardent could potentially go down the road and integrate skilled nursing to their hospital portfolio. Again, how do you view skilled nursing exposure of your potential tenants in that regard? Is there a changing that you would get more comfortable given your prior comments on the industry have been pretty negative?
We have seen for many years, I've been working 19 years to get to a place where we are right now within the portfolio, which I think speaks for itself. I would say that the trends that we see in the skilled nursing business have been significantly negative for a very long time, and we continue to see those headwinds. There have been a lot of smart people over the years who have waded into the business, and it's a very difficult business. We're happy with where we are. We're happy investing in our life science MOB business in the way that Bob described. That's really where our focus of moving our business forward is. We do continue to see senior living over time being also a good place to be.
Just one last question on Brookdale. I've never seen so many people unhappy that your FFO and cash flow is not lower than you actually got it to be. In some ways, if things get better and you would've lowered the rent further, you would never have seen that upside over the next eight years that you've extended the lease. I guess in regards to that, if things do get worse, you run into this issue where you may have to have discussions. Did a structure of a participating lease, with a floor and potential upside, come about? Did you talk about maybe having certain assets being SHOP assets relative to net lease assets? Just trying to better understand the dynamics that went into the negotiation.
Well, thank you. Yeah, we killed a lot of brain cells over coming up with what we thought was the optimal solution for both Brookdale and Ventas shareholders that could really. I really believe that this is one of the things that our team has great expertise and a track record in, whether it was with Kindred or others, which is really looking at a situation and figuring out, A, how both people can be better off, achieve the goals that they have, and also optimize the results and advance the interest of Ventas shareholders. I think this is a really great proof point of that. There were many different ideas and structures that were considered, discussed. Brookdale was, I think, really creative and cooperative in the process as well, and we came up with what we think is the best outcome.
Honestly, I'm so glad you said that because I think we achieved that and that the constituents of both companies should be really happy with the outcome.
All right. Good luck in the playoffs. Thanks.
Go Pens. Is that our final question? Okay, we want to thank everyone sincerely for being here today, for your interest in and support of Ventas. We appreciate everything you've done to make the last 20 years at Ventas such a great success story, and we look forward to seeing you again soon. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.