VTR
#Thanks Debby
Our high quality portfolio showed continued momentum in the third quarter with all segments contributing to a 2.1% overall growth rate versus prior year
With solid year-to-date performance, we are updating and improving our same-store growth outlooks for the year by 25 basis points at the midpoint
Let me unpack these results for the quarter
Starting with our triple-net business, which represents 38% of our NOI
The triple-net portfolio grew same-store cash NOI by an attractive 3.8% for the third quarter of 2017, driven primarily by in-place lease escalations
Cash flow coverage in our overall stabilized triple-net lease portfolio for the second quarter of 2017, believe its available information, health study at 1.6 times sequentially
In our triple-net seniors housing portfolio, trailing 12 months, same-store EBIT arm coverage was steady at 1.3 times
With the majority of our NOI, clustered around the portfolio coverage average
We view seniors housing triple-net coverage of 1.2 to 1.4 times to be within normal market ranges through cycles
Our strong lease protections and diversification also provide additional security
As Debbie mentioned earlier, given our intention to enter into a joint venture for over 70 senior housing assets currently lease to Elmcroft, we are now excluding these assets from our triple-net coverage and same-store supplemental reporting in current and prior periods
In our post-acute business, IRF and LTAC coverage declined in the quarter by 10 basis points sequentially to 1.6 times, driven by rent increases, the continued impact of the LTAC reimbursement change and labor wage pressures
We expect to realize the benefits of patient criteria mitigation in our coverage ratio starting in the first half of 2018. Having now received the majority of the proceeds from the sales our Kindred SNFs, skilled nursing will soon represent just 1% of Vantas' NOI
SNF industry volume and mix headwinds continue to lower coverage in the segments
However, our remaining SNF portfolio has very healthy lease protections that provide additional security and rent reliability
Finally, Ardent delivered terrific performance in the first half of 2017 with volume, revenue and EBITDA improvements ranking among the top performers in the industry
At the asset level for the Ventas properties, rent coverage remained stable at three times in Q2. Ardent integration of the LHP Hospital is right on track and budgeted synergies are being realized
With encouraging year-to-date triple-net results, we are raising our full year 2017 triple-net same store NOI guidance by 25 basis points at the midpoint to now grow between 3% and 3.5%
Moving on to our senior housing operating portfolio
We are pleased with our SHOP results in a third quarter, growing same store cash NOI by 0.6% versus prior year
Continued profit growth in the context of industry-wide challenges underscores the quality and resilience of our portfolio and the strength of our operators
Looking at the SHOP P&L, occupancy increased sequentially by 40 basis points to 88.7% in the third quarter
As expected, the Q3 year-over-year occupancy gap widened to 230 basis points versus the 200 basis point gap we saw in the second quarter, driven by the impact of continued new competition in select markets
Encouragingly, rate growth was solid in the quarter at nearly 4% which was ahead of our expectations
Rate increases and the high barrier-to-entry markets continue to trend southerly above our portfolio average, while rate in markets with new supply is also growing overall despite price competition
Our operators also did an excellent job of cost containment in the third quarter
Overall expense increases where health just 1.7% despite continued wage pressures
In addition to flexing labor with occupancy, our operators held non-labor costs essentially flat
Reduced performance incentives also benefited the quarter
At a market level, we continue to see momentum in high barrier-to-entry locations such as Los Angeles, Boston and Toronto which drove very strong top and bottom line results
Performance in Canada continues to grow from strength to strength, growing NOI approximately 10% in the quarter, the second consecutive quarter of double-digit gains
Partially offsetting the strength was performance in geographies affected by new competition most notably within secondary markets
While still at elevated levels, new openings in the third quarter were delayed relative to Nick projections
At the same time, new construction starts in our trade areas were flat in the third versus the second quarter
As a result of both of these factors, new construction as a percentage of inventory in our trade areas picked up by 20 basis points in the third quarter underscoring that the impact of new deliveries will carry forward into 2018. From a demand perspective, we were very pleased to once again see greater than 3% absorption gains in the third quarter, suggesting a continue trend of increased penetration rates for senior housing
The security of our residence during the hurricanes is yet another example of the value proposition of senior housing and the potential to raise the penetration rate among seniors above the current 11% level
For the full year 2017, we're updating and narrowing our SHOP portfolio same-store NOI guidance to now grow between a 0.5% and 1.5% versus the previous range of 0% to 2%
The new guidance midpoint implies a modest year-over-year NOI decline in the fourth quarter
That said, our SHOP operators are sharply focused and incentivized to positively close out the year
Rounding out the portfolio view is our highly valuable office reporting segment, representing 25% of Ventas' NOI and comprised of our university based life science portfolio and our high quality medical office business
To help bring the quality of our office portfolio to life for investors, we have expanded our disclosures on tentative versification and credit strengths in this quarter's supplemental reporting
Our life science operating portfolio continued to perform very well through the third quarter
Sequentially, total occupancy remained excellent at 97.5%
We have been really pleased with the reliability of our life science cash flows
In fact, 75% of our rent is derived from investment grade credits for companies with a billion plus in equity market capitalization
In our medical office business, same-store cash NOI in the third quarter increased by 1.5%
We delivered 91.8% occupancy through new leasing and tenant retention that exceeds 80% year-to-date
This retention rate underlines the strength of our diversified MOB portfolio
A few other quantitative examples include over 95% of our NOI is affiliated with leading health systems
Our portfolio is well diversified with our top five health systems representing less than 20% of our MOB base rents
And our tenant's credit profiles attractive with 75% of NOI affiliated with a health system that is rated single A or better
These attributes help drive third quarter revenue up over 2%
Expenses outpaced revenue growth in the quarter principally from lapping a real estate tax credit in the prior year third quarter
Adjusting for this item, expenses grew modestly below revenues
With solid year-to-date results on a valuable platform, we have raised the midpoint of our guidance by 25 basis points to a range of 1.5% to 2% for a same-store medical office assets in 2017. Before diving into our company's overall financial results, I note on the financial impact of hurricanes Harvey and Irma in the quarter
Total direct cost for Ventas resulting from the hurricanes including property damage and other costs approximated $10 million or $0.03 per share in the third quarter of 2017. These expenses reduced our income from continuing operations and NAREIT FFO in the quarter, but have been executed from the company's reported NOI and normalized FFO
So we have appropriate coverage
We have not recognized any insurance proceeds in the quarter or in our guidance, because the timing and amount are still uncertain
With that, let's review our overall Q3 financial results
We are pleased to report another quarter of earnings growth together with even more robust financial health
Third quarter 2017 income from continuing operations per share grew 5% to $0.44 compared to the third quarter of 2016. Normalized FFO per share in the third quarter grew 1% to $1.04 compared to the third quarter of 2016. Third quarter results were driven principally by accretive investment and improved property performance versus prior year, partially offset by the impact of dispositions in loan repayments
Ventas funded investments of over $80 million during and immediately after the quarter, notably including life science development spend for projects currently underway
We are excited to have received $570 million of the $700 million of value creating Kindred SNF sales at a 7% cash and 8% GAAP yield
Thereby reducing our SNF NOI exposure to nearly 1%
We have recognized gains exceeding $500 million on these sales
The accelerates SNF disposition timing represents a $0.04 reduction from the high end of our prior normalized 2017 FFO guidance range, and a $0.07 incremental reduction to FFO in 2018 relative to 2017 due to the sales and use of proceeds for debt reduction
We also increased our liquidity and flexibility to renew an innovative $400 million revolving structure facility to fund our exciting development pipeline anchored by our life science business
The result of this cumulative activity is a robust financial position at quarter end, including improvement in net debt-to-EBITDA to 5.7 times, lower total indebtedness to gross asset value of 39% and steady fixed charge coverage at an exceptional 4.6 times
Let me close out our prepared remarks with our updated 2017 guidance for the company
Specifically, total portfolio same-store cash NOI is anticipated to grow 2% to 2.5%, an increase of 25 basis points at the midpoint
We expect income from continuing operations to range from $63 to $74 and NAREIT FFO to range from $4.07 to $4.12 per fully-diluted share
Both modestly lower than previous guidance to principally to the $0.03 per share hurricane related expenses
Our normalized FFO per share is forecast to range from $4.13 to $4.16. The midpoint of our narrowed normalized FFO per share range remains unchanged from previous guidance because improved property performance offsets the accelerated completion of the Kindreds SNFs sales
Consistent with previous practice, we have not included any further material investments, dispositions, loan repayments or capital activity in our outlook
We assume approximately 359 million weighted average shares for the full year 2017. To close, we're pleased with the excellence we have delivered thus far in 2017. However, this track record of Ventas excellence extends over decades not just years and the team that has delivered it remains tight, collaborative and cohesive
And one of course is Debbie
We are particularly proud that Debbie was once again recognized by the Harvard Business Review as one of the best performing CEOs in the world
She is one of 23 CEOs named to the Harvard Business Review list before consecutive years and one of only two women on this year's list
Ventas's financial performance rank 32nd out of nearly 900 companies globally for over 18 years, that is truly excellent to stand
With that, I will ask the operator to please open the call for questions
Question-and-Answer Session
Sure <UNK>
Bob here
We're really pleased to see the expense growth the 1.7%
We have given guidance early in the year and that's helps me true of about 4% I call it constant volume wage pressure and we continue to see that
So what obviously therefore happening is the operators doing a great job of managing down the other costs not labor costs together with flexing labor with occupancy and that's what's driving the benefits in the quarter
I believe a lot of those costs savings remain sustainable and particularly flexing labor with volume is to go back in time and look at historical occupancy levels, we still have plenty of cushion relative to where we were at lower
So there is still opportunity there and for those with scale which our operators have to continue to drive that to reduce and hold non-labor cost, so still room to run there
In terms of your second question on software implementation costs, that's a onetime cost with Sunrise and putting in the software for care and so we've adjusted that out as non-recurring
It's for care compliance <UNK>, really to be able to when care is provided to a resident to be able to monitor and track that and ultimately bill for it, so
Right, so onetime software upgrade basically
Well, anecdotally we continue to hear it's more difficult to find difficult to find operators to get financing, to find good locations in terms of supply, Debbie quoted some of the steps in terms of starts relative to two years ago which are down nearly 50%
So both the anecdotes and the facts would suggest there's a positive trend there which we're pleased with
As we think about labor going into 2018, obviously a bit early to give guidance
I do think wage pressures will continue, labor pressures will continue into 2018 there
Therefore we're going to turn to price again
I'd emphasis how pleased we are on the rate side with 4% we saw me a year and again we're seeing that across the portfolio and that's really encouraging
Let me differentiate between underlying asset performance and our triple-net same-store
Our triple-net same store has performed very well year-to-date and the race to 3 to 3.5 really reflects the fact that we've done three quarters of the year
And really see stability in that portfolio everything about the rental income
So that through guidance for us
In terms of trends in the underlying portfolio, I think the same the same store senior housing triple-net portfolio same headwind to the industry
And so we probably will see some pressure on that 1.3 times as we go forward here
But again we think got to within underlying norms within the industry
We've been really pleased <UNK> with Canada of course two consecutive quarters now of double-digit growth
And when you look within the occupancy nearly 95%, what course we have is a supply demand equilibrium in Canada, we have great assets in Canada very well operated
And in light of the high occupancy, we've been pushing price again
I think that's a big driver of this performance
So I hope it will be top obviously next year but the fundamentals are there
On the U.S
side, it's very much as we've portrayed I think if you go back to beginning of the year and the framework on guidance we laid out there that's where the year is really kind of very consistently so we really know the surprises so far
Sure
Well, two things as we think about construction that are important which is deliveries and new starts
And in the quarter, this quarter we did see delays in deliveries and that together with flattish new start is what drove the ratio up
And therefore again a step back, I think there's clearly a carry over to 2018. The underlying trends for the industry in terms of starts, we believe will part of our portfolio equally
Within that from a market point of view, one also had to look at demand of that supply growth and for our engine room markets as I described them, we consider this a very, very strong performance and that's LAs, Boston and the New York as I've highlighted
So though in certain areas there have been some new access coming online, again the engine room is strong and the rate is particularly strong in that
So we are feeling good about it
Unidentified Analyst Okay
Thank you very much
Appreciate that
I'll follow-up if I may
You talked about the recently announced JV, I know you just announced it today, so it's fresh
Could you possibly talk about how the JV is being valued and how is demonstrates the value of your portfolio?
Yes, hi Rich
I'll try to
The applied fourth quarter is really U.S
dynamic and really again it's down to the views of deliveries in pacing of new supply
I mean that midpoint really assumes
We have something more compression on the occupancy line
So we'll see but that's what driving that assumption
The question was the profit adding capital spend and it's 200 year-to-date
It's really split between life science and SHOP
And I think the number is still pretty good, pretty good having, that's going to here there about the same
Yeah, so let me break that down a little bit for you
The 10 million is really split call it 50-50 between property damage and other direct costs the other half associated with things like evacuation, meals, lodging et cetera
We have not to emphasis assumed any - yet any insurance proceeds reimbursements
We have insurance obviously to covers those types of events
We have recognized you got the light of the uncertainty of timing and amount
So that's a gross number
It is flowing through the other expense line of the P&L, so it's below NOI
And as I highlighted in the prepared remarks, therefore it's still continuing including in but excluding from NOI and normalized FFO
Thank you
We don't differentiate in that analysis, so stabilized versus non-stabilized, nor do we in same-store at close in
I think the thing that's important to continue to look at when you look at the construction pages, the demand side of the equation then harking back to our framework where we have on average 3% demand as our equilibrium point
And so many of these markets where there is new construction coming online, there is high demand as well
Sure
The secondary markets is where we did see the blunt of new competition and I'd highlight markets like Salt Lake city for example flow into that secondary market segmentation
And it is - when we looked our portfolio and segmented it to say where do we have equilibrium versus a surplus
Many of those markets where we have surplus are in the secondary markets, so that's where we are seeing the impact and you can see quite clearly in the quarter
I think the supply dynamics I mentioned in terms of new deliveries will carry into 2018 no double in some of these same markets
That's a great question and shame it's the last one of the day, it's really interesting
And we are seeing the rent growth, the growth as I mentioned in some of those markets they have new supply
And that is a combination of what I call the releasing but also it is base rent increases
And what is very important and our operators do a very good job is understanding how that releasing spread is trending overtime
And I think in our portfolio generally we feel pretty good about that releasing spread being within norms that are acceptable
So the rate side of the equation is really held us
