Ventas, Inc.
Q1 2009 Earnings Call Transcript

Published: 5 May 2009

[Operator:]

Good day ladies and gentlemen and welcome to the First Quarter 2009 Ventas Earnings Conference Call. My name is Kameesha and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. David Smith. Please proceed

[David J. Smith:]

Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2009. 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. These projections, predictions and statements are based on management's current beliefs as well as on a number of assumptions concerning future events. The 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. We refer you to the company's reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2008 and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman, President and CEO of the company.

[Debra A. Cafaro:]

Thanks David. Good morning to all of our shareholders and our other participants and welcome to our first quarter 2009 earnings call. My colleagues and I are joining me today from our Louisville office. I'm happy to report that things are good at Ventas. Our safe, strong financial strategy is working. At 35% debt to enterprise value, four times debt to EBITDA and extended undrawn credit facilities and limited near-term maturities, Ventas is clearly in a great balance sheet and liquidity position. We are committed to an improving investment grade credit profile. We are also pleased to announce that Kindred has extended the term for all 109 healthcare assets whose leases were maturing in 2010. The leases for these skilled nursing facilities at long-term acute care hospitals will continue on existing contractual terms including escalation until 2015. This extension of over $127 million in annual cash rent demonstrates the quality and productivity of our diverse healthcare assets and the reliability of our cash flow. And finally, we are reporting excellent first quarter earnings. Today, we will discuss those earnings, our numerous capital markets transactions, portfolio performance, recently proposed Medicare rules and our outlook for the balance of the year. First, normalized FFO was $0.67 per share for the first quarter, flat with the year ago, which is an excellent result and slightly ahead of our expectations. It is also important to point out that at the corporate level, our first quarter 2009 cash flow from operations grew 7% and our normalized FFO increased 5% from the year ago period. Turning to our capital markets activity. In February, we said that we would continue to execute an aggressive strategy of balance sheet management to stay ahead of the commercial real estate credit dislocation. This approach requires that we

[Richard A. Schweinhart:]

Thank you, Debbie. First, comparing the quarter to the first quarter last year, normalized FFO per diluted share was $0.67, stable with last year. Normalized FFO was $95.7 million, up 5% from $91.5 million last year. Triple-net lease revenues grew to $116 million from $113.5 million, primarily due to contractual escalations. Sunrise NOI was $30.5 million compared to $33.4 million last year. The reduction was principally due to the Canadian exchange rate, one fewer day in the first quarter this year versus last year and lower occupancy. Medical office building NOI grew to $5.4 million from $3.4 million due to acquisitions. Interest income on loans and investments was $3.3 million compared to $0.5 million last year, all due to investments made in the last year. Interest expense decreased to $46.6 million from $52.4 million last year, principally due to debt repayment. G&A increased to $10.6 million in the first quarter of 2009 from $8.3 million. Weighted average shares outstanding increased to 143.1 million from 136.7 million. The share account increased due to our August 2008 equity offering. Now, comparing the first quarter to the fourth quarter of 2008. Normalized FFO per diluted share increased a penny to $0.67. Normalized FFO was $95.7 million, up 2% from $94.0 million last year. Triple-net lease revenues, medical office building NOI, interest income and average shares outstanding were all flat with the fourth quarter. Sunrise NOI was 30.5 million compared to 32.2 million in the preceding quarter. The decrease was principally due to too fewer days in the quarter and lower occupancy, offset by an increase in the average daily rate to $170 from $167. Expense control strengthened in the first quarter and we benefited from a reduced management fee of 5% of revenues. Interest expense improved significantly to 46.6 million from 51.2 million in the fourth quarter of 2008, due primarily to opportunistic debt repayment and purchases made in the fourth quarter. G&A decreased slightly to $10.6 million in the first quarter of 2009 from $11.2 million last year. First quarter FAD per diluted share was $0.64, an increase of 5% sequentially. Per share FAD was flat compared to the first quarter of 2008. On March 31, 2009, the company extended and amended its unsecured revolving credit facility from 2010 to 2012. The facilities contain two portions. $590 million matures in 2012 and is currently priced at LIBOR plus 280 basis points and $277 million matures in 2010 and remains priced at LIBOR plus 75 basis points. The blended rate is currently LIBOR plus 217. The entire facility carries a 20 bp debt facility and we will amortize the financing fees and expenses over the life of the facility. In April 2009, the company issued 13.1 million shares of common stock and received gross proceeds of $312 million. We also issued unsecured senior notes due June 1, 2016, receiving gross proceeds of $169 million. The notes have an effective yield to maturity of 9.6%. Proceeds from the senior notes and common stock offerings were used to purchase $306 million of our outstanding senior notes, which will result in forward interest savings of 7.5%. We expect to report a $7 million loss on early extinguishment of debt in the second quarter. Consistent with our guidance, the loss will be excluded from normalized FFO. The balance of our offering proceeds were used to pay down the revolver. At May 4, 2009, the company had $10 million outstanding under its credit facility, $58 million in cash and $853 million of undrawn availability. The company's debt or total capitalization currently is 35%. Our net debt to pro forma EBITDA is 4.0 times. As of May 4, 2009, the company has $35 million in total debt maturities remaining in 2009 and $171 million in total debt maturities in 2010, excluding normal periodic principal amortization payments. Taking into account our new credit facility, our April reequitization, our May bond repayments and tenders and our first quarter results, we are revising guidance for 2009 to between $2.48 to $2.58 from $2.55 to $2.65 per share. From midpoint to midpoint of the guidance ranges, these factors combine to reduce our guidance less than 3% per share. To recap, we have focused on our balance sheet, which is strong. We have excellent liquidity. Our first quarter normalized FFO per share was excellent and we look forward to continue the positive results for 2009.

[Debra A. Cafaro:]

Operator, we'll be happy to open the floor to questions.

[Operator:]

Thank you. (Operator Instructions). And your first question comes from the line of David Toti from Citi. Please proceed.

[Michael Bilerman:]

Good morning. It's Michael Bilerman here with David. Debbie, I wanted to ask you, you talked a little bit about your balance sheet and how strong and a lot of the moves that you've made. And I think you mentioned the first time fixed charge has been north of three; debt to EBITDA of four times, which is significantly below both your peers and REITs overall. Debt to gross asset value below 40%. All these key ratios highlighting into leverage. As you think forward, because I think you've also talked a little about being optimistic in investing capital, how do you sort of see the balance sheet in terms of where you're willing to take leverage and think about how much capacity that gives you?

[Debra Cafaro:]

Well, good morning Michael and team and thanks for joining. Right now, I think the focus really is on reducing aggregate leverage. And as you point out, that does two important things for us. It will allow us to weather a dislocated credit market that may continue to persist. And it will allow us to be opportunistic when we think we see something that makes sense for our company. It's too I think early to say right now how we're going to use that strength and. It is -- we're not prepared to give the all clear in terms of the credit markets or the economy. So we're taking a wait and see approach. But our overall view is that having this strength is going to benefit our stakeholders well because either way things go, we're going to be in a position to win.

[Michael Bilerman:]

And that's fair. I guess if I am thinking more about long term is at some point, we will get an all clear. And I am just trying to put goal posts around where you would take the balance sheet because unless you are talking that you are going to stay at these sort of levels even if you are going to go in and buy, you will always get the balance sheet at this level? Or is it we're willing to go, we're willing to take leverage to 50%, we are willing to take net debt to EBITDA from four to six times? And obviously, when you do that, there is going to tremendous growth, and a lot of it will be debt fuel. So I'm just trying to figure out where your mindset is in terms of how you are going to manage the company once we do get an all clear.

[Debra Cafaro:]

Well I mean you are right to say that we have a tremendous amount of capacity if we were to use that capacity to even get to meet our higher rated peers leverage levels. And again, that's very positive. I think longer term, we may still want to get a better view where the credit markets are going and really what our stakeholders will be valuing before we put a stake in the ground and say, this where longer term we want our credit stats to be. I think we need to know more about the world around us and the environment before we're ready to say, we can use a billion of capacity, or whatever it may be. So I hope you'll give us time to let the world around us evolve so that we'll be able to answer that question with better specificity as the year progresses.

[David Toti:]

Great. Thanks Debbie. This is David here. Can we go back to the issue of the 2010 reimbursement proposals from CMS and just quantify what your expectations are for the -- with the comment period?

[Debra Cafaro:]

Well, what's going to happen, remember, the LTAC rate went up 2.8%, which is great. The SNF rates are proposed to go down 1.2% through a combination of adjustment. And there is one adjustment that takes the rate up, which is a market basket increase, or inflationary increase, and then an adjustment that takes it down into negative territory. Last year, the care providers successfully persuaded CMS, which proposed the same downward adjustment last year to take it off the table because it isn't necessarily consistent with the idea of pushing patients to the lowest cost, most clinically appropriate setting. So I think the operators will focus their attention again on removing that SNF negative adjustment, which then, if removed, would allow for a positive reimbursement rate for fiscal year 2010 for the SNF.

[David Toti:]

Okay. And then could you quantify any impact to the hospitals as well?

[Debra Cafaro:]

Well I think net-net, again, our tax flows on the Kindred portfolio are going to be sort of -- the EBITDAR should be the same or up from current levels on a blended basis.

[David Toti:]

Okay. And then just thinking about some of comments that you made relative to partnering a little further with some of your operating tenants. And you've obviously made some strides with Brookdale. Have you had any discussions with Sunrise in the same regard?

[Raymond Lewis:]

Hi David, this is Ray Lewis. I think that, as Debbie said in her comments, we would consider doing a deal if we can get a good deal for our shareholders, putting out limited quantities of capital that will help and strengthen our partners. And certainly, we have our minority interest with Sunrise and other contractual relationships. And if we can find a way to better ROI (ph) there and help Sunrise, that is something we would certainly consider.

[David Toti:]

Okay. And then just lastly on the Brookdale line of credit investment, is that -- what was the discussion around? That's a relatively small investment for you. Why not something larger in scale?

[Debra Cafaro:]

Again, I mean we want to really be there with discrete amounts of capital to support our tenants. And to extent there, with the little gaps to fill, we felt very comfortable being supportive at that level for Brookdale.

[David Toti:]

Okay, great. Thanks for all the detail.

[Debra Cafaro:]

You're welcome, thank you.

[Operator:]

And your next question comes from the line of Karin Ford from KeyBanc Capital. Please proceed.

[Karin Ford:]

Hi, good morning.

[Debra Cafaro:]

Hi Karin.

[Karin Ford:]

Just wanted to follow up on David's question there with respect to Sunrise. When you guys would thing about potentially working and helping those guys out, would you consider potentially changing the terms on your management contract with them?

[Debra Cafaro:]

Well, as Ray said, Karin, Sunrise has minority interest that we've already said might be an avenue for providing capital to Sunrise on a win-win basis. And we do have contractual arrangements with them. And frankly, our contractual arrangements are fairly positive. We has a flat (ph) management fee that we're getting the benefit of now that allows the management fee to go down to 5% of revenues. We have performance termination rights and cost controls and the management contract. So our contracts are pretty darn good. All that said, those kinds of things could all go in the mix if we were to consider doing a transaction with Sunrise.

[Karin Ford:]

That's helpful, thanks. Second question is just regarding the dismissal of the counterclaim that HCP had filed against you in court that happened back in March. Can you just discuss any changes to any of your accruals or your legal expenses or any change in strategy there after the dismissal?

[Debra Cafaro:]

You broke up a little bit, but what I heard you say was that the HCP counterclaim in our litigation were dismissed in March. And what was the other -- the second part of the question, I'm sorry?

[Karin Ford:]

Yeah, just if that development changed anything with respect to your accruals in the lawsuit, your expected legal expenses or just anything different in your strategy with the trial coming up in August?

[Debra Cafaro:]

Well it's all systems go in terms of really preparing (ph) for the trial, which is in Kentucky in August. And our strategy hasn't changed. The aspect of the dismissal which is positive is that the jury at this point will only hear our case against HCP, and that will be all. So assuming that decision holds, that will all really focus the trial and probably would minimize the trial expenses.

[Karin Ford:]

That's helpful. Thank you very much.

[Operator:]

And your next question comes from the line of Jerry Doctrow from Stifel Nicolaus. Please proceed.

[Jerry Doctrow:]

Thanks. I just wanted to get a little more color on a couple of items. On Sunrise assets, obviously, there is a lot moving on in terms of Canadian currency adjustments and other sorts of things. Trying to just focus on same-store stabilized, it looks like things were just a little softer on occupancy, a little softer on margin. So I want to just maybe get anymore color and see if that observation is right. And then I was wondering if you could talk about steel specifically since that's the big property left in lease up.

[Debra Cafaro:]

Absolutely, Jerry.

[Raymond Lewis:]

Sure. So, Jerry, as you look at the same-store stabilized portfolio, you'll see that occupancy was down slightly quarter-over-quarter from 90.7 to 89.1%. I think this is consistent with our guidance and conversations on our last call where we talked about I think some continued softness as the economic recession plays out and bottoms through the rest of the year. I think we're pleased that Sunrise has gained traction in its cost controls and it's been able to mitigate the impact of some of that softness on the bottom line. And we expect that they will continue to focus in that area and hopefully improve on the cost control through the balance of the year. With regard to steel, the lease up continues to go well at the community. Again, I think if you look quarter-over-quarter, we've continued to make progress in that regard. The asset is now about 64% occupied and is generating positive cash flow. And so it's generally moving in line with our expectations.

[Jerry Doctrow:]

Okay, that's helpful. And I guess the other thing I was just trying to sort of think through, a huge number of moving parts with the equity offerings and those sorts of things. When you think about sort of your current guidance, sort of the $0.10 range, are there any big things, or what are maybe the big things that sort of move you within that? I am assuming -- we're assuming no acquisitions and that sort of stuff. So was it just interest rates or what are the other variables we should be thinking about?

[Debra Cafaro:]

Yeah, I mean the two big things, Jerry, really are Sunrise' results, which, if Sunrise trends more softly through the balance of the year, that's a big swing factor. And the other would be when we do the Freddie and Fannie deals, assuming that we do, we'll have to use of proceeds and how long it takes to deploy those proceeds. So those have fairly significant clean items, clean factors within the $0.10 range.

[Jerry Doctrow:]

And just in terms of the redeployment of capital, I guess there is a little bit left on the line. But at this point, it could be new investments or it could just be further debt reductions or just --

[Debra Cafaro:]

Right. I mean, we have thought about 200 million of mortgage debt that's due is 2009 and 2010. And obviously, we've tried to be intelligent about our use of proceeds and we'll continue to do so. And if we do find any other attractive opportunities to invest, I mean we certainly would consider that. So just back to your question, that use of proceeds is a big swing factor in the $0.10.

[Jerry Doctrow:]

Okay.

[Debra Cafaro:]

Timing (ph), yes.

[Jerry Doctrow:]

And what's -- and the yield on the mortgages that are maturing?

[Debra Cafaro:]

I mean to say they are in the sevens and eights.

[Jerry Doctrow:]

Okay. All right, thanks.

[Debra Cafaro:]

Thank you.

[Operator:]

And your next question comes from the line of Bryan Sekino from Barclays Capital. Please proceed.

[Bryan Sekino:]

Hi, good morning. Just a couple of questions here. Apologize if I missed it, but did you give the components of the new guidance and just wondering if the sale of the facility is part of that.

[Debra Cafaro:]

The sale of the facilities did not have a major impact on the guidance.

[Bryan Sekino:]

Okay. Okay. And then if I could just move over to the Sunrise portfolio real quickly.

[Debra Cafaro:]

Okay, good.

[Bryan Sekino:]

With regards to you mentioned the stability and occupancy towards the end of the quarter. Just wanted to know what the trend is that's causing that. Is it kind of like an increase in move outs or more move ins? Can you just flesh out a bit?

[Raymond Lewis:]

This is Ray, Bryan. I think it's a little too early to tell what the trends would be. I think when we looked at the numbers in April, we did see a consistent level of move ins, which is good. And the move out trends had abated somewhat. But one month I think is a little difficult to draw any specific conclusions from.

[Bryan Sekino:]

Okay. Okay. And then the cost controls that you are starting to see in the Sunrise portfolio, what areas are you able to make headway there?

[Raymond Lewis:]

So I think Sunrise has done a nice job in working on its variable labor. Earlier this year, they implemented a new variable standard, which was about a 25% decrease from the standard that they had in place last year on variable labor. And they've been driving the communities to compliance with that new standard. I think other areas where we've seen them make some progress are in other controllables such as supplies and those sorts of things. And then also, as Debbie mentioned in her comments, we've seen the benefit of having our management fee flex down.

[Bryan Sekino:]

Okay. Thanks. And then just one last question here. In the past, you had talked about the MOBs being a place -- an area where you might look for acquisitions. And we've heard commentary about things getting interesting in the senior living space as maybe some struggling operators look to divest assets. Just wanted to get updated thoughts from you just regarding acquisitions if they are on the table.

[Raymond Lewis:]

Sure. I think just as a general comment, Bryan, that healthcare assets have generally been performing pretty well. And there is also -- because of their relative performance, they've been able to access capital from lenders like Fannie and Freddie, HUD and others. So we haven't seen a lot of these assets coming to market under distressed conditions yet. Certainly, the longer the current conditions persist, the more likely it is we'll see those types of opportunities. That having been said, I think we're seeing a handful of opportunistic situations that may become interesting. Certainly, we're well positioned to capitalize given the balance sheet statistics that Debbie has been talking about. But we're going to be patient I think and disciplined in our approach to these opportunities.

[Bryan Sekino:]

Okay. Thanks for taking my question.

[Debra Cafaro:]

Thank you.

[Operator:]

And your next question comes from the line of Rich Anderson from BMO Capital Markets.

[Richard Anderson:]

Thanks and good morning everyone.

[Debra Cafaro:]

Hi Rich.

[Raymond Lewis:]

Hi Rich.

[Richard Anderson:]

Just talk about that hedge for a second as you called it for reimbursement rates between LTACs and SNFs. Make sure I have this right. Your SNF portfolio is about twice the size of the LTACs, at least the Kindred portfolio is twice the size of the LTACs, is that correct? Kindred SNF portfolio?

[Debra Cafaro:]

Yes, the rent is about -- it's like 40%, 60%, something like that.

[Richard Anderson:]

Okay. And then you have 30 other non-Kindred SNFs, is that about right?

[Debra Cafaro:]

We do.

[Richard Anderson:]

Okay. So I just wanted to, as I go through that math --

[Debra Cafaro:]

What I'm suggesting, there are two things that are important to understand. One is that the LTAC coverages are significantly higher. So they have a different sort of weighting. They also have a much bigger Medicare component than the SNFs do.

[Richard Anderson:]

Right.

[Debra Cafaro:]

And the third thing, again, is that as we've seen over the last 10 years, we've often seen, even though they're both part of the Medicare program, we've seen countercyclical reimbursement trends. And that is continuing. And what happens is that because we have these pooled multi-facility master leases that have both segments within, those have tended to support and balance each other over a very, very long period of time. And that is very, very important and helpful.

[Richard Anderson:]

Okay. Why did the management fee go down in the Sunrise portfolio?

[Debra Cafaro:]

Well, as I mentioned, we actually have favorable management contracts with Sunrise. And the base management fee is 6%, but it can flex down under certain circumstances based on performance levels that were set at inception and that compound over time. And so essentially, it's an alignment in an ascended structure and we're getting the benefit of a 1% diminution in the management fee at this point in time.

[Richard Anderson:]

Okay, understood. Thanks. You mentioned the unencumbered pool. How big is it and how much of that can you actually tap and maintain your investment grade ratings?

[Debra Cafaro:]

It's about 1.5 billion of encumbered assets. And we would intend to use it judiciously. And we, obviously, through all of our comments and all of our blood, sweat and tears are committed to maintaining and improving investment grade credit profile. So basically, when we do -- if we do a couple of 100 million of Fannie, Freddie deals this year, we're basically just repaying mortgage debt that's rolling off.

[Richard Anderson:]

Right.

[Debra Cafaro:]

So it's mortgage debt for mortgage debt.

[Richard Anderson:]

Okay. In terms of your unsecured issuance, what was the rationale to do that at that level? Can you sort of walk me through the logic?

[Debra Cafaro:]

The bond deal (ph)

[Richard Anderson:]

Yes.

[Debra Cafaro:]

Sure. So we did seven year bonds at about 9.5%.

[Richard Anderson:]

I'm saying why -- what was the thought process to tap capital at 9.5% when you have --

[Debra Cafaro:]

Well, basically, we were looking at debt, we were looking at equity. We believe that the debt is modestly a keeper if you will then the equity, which we view, is very precious. So we try to balance those two. And basically, we'll just use the bond deal to stretch out maturities.

[Richard Anderson:]

Okay.

[Debra Cafaro:]

We paid a little bit more per tenor (ph) and used that money to pay off near-term liquidity. So I think it works the way we hope and our equity holders were pretty excited that we could print a deal in the single digits when we did.

[Richard Anderson:]

I think it was outstanding. Now in terms of equity, you did your deal at 23.90 and you tested the $30 mark again. I mean is equity off the table to revisit or are you sort of good for now?

[Debra Cafaro:]

Well, we have a great balance sheet, so we're good for now. But I do want to say, we love making money for our stakeholders. We want our stakeholders to know that when they buy Ventas paper, they are going to make money. So we feel good about that. And I think for the time being, equity is not necessary. We have -- equitizing the company to the point where we have fabulous balance sheet and liquidity.

[Richard Anderson:]

Okay. Just one or two more. In terms of the new credit facility, is there an order of priority where you have to use the more expensive portion first or is there no sort of structure like that?

[Richard Schweinhart:]

This is Rick Schweinhart. We in effect have -- do well broken between Canada and the United Sates. But there is basically a kind of a mix in each one. So it's basically right at that 217 bps that I mentioned.

[Debra Cafaro:]

It carries us to pro rate.

[Richard Anderson:]

Pari passu. Okay, great. And then finally, anymore of these types of sale opportunities. I can recall several years ago when you sold to Kindred as a sixth and they sold and then they -- then they did the same thing at a nine. Now the numbers are a little different I guess, different circumstances, but are there other opportunities within the portfolio that you could see right now or do you think that you've done a pretty good job at getting rid of those sort of win-win situation for the two of you?

[Debra Cafaro:]

Well this is the fourth time I think that we've done this at lease maybe a little bit more and overtime, there will always and develop underperformer and it is great for both companies when Kindred can buy assets for 58 million and then resell them for 10 to 15 and how to be good for both sets of shareholders. So, we are happy to continue improving the portfolio this way and as opportunities present themselves which I assume overtime, they'll continue to do so, we'll hopefully work with Kindred to execute.

[Richard Anderson:]

So there are a few more weak links in the portfolio that looks --

[Debra Cafaro:]

As my partner, Rich Schweinhart says, there is always a bottom 10%.

[Richard Anderson:]

Okay. Thank you very much.

[Debra Cafaro:]

Thank you.

[Operator:]

And your next question comes from the line of Omotayo Okusanya from UBS. Please proceed.

[Tayo Okusanya:]

Good morning, Debbie. First of all, congratulations on just building a fortress of a balance sheet and should start (ph) very well in the future.

[Debra Cafaro:]

Thank you.

[Tayo Okusanya:]

A couple of questions. First of all, I know you don't get asked this much, but the loan work, just curious at this point if there is anything in there you're watching closely. I know last quarter, you had the Sunwest write offs, but kind of trends at this point in regards to delinquencies or non-accruals would be helpful.

[Debra Cafaro:]

We have a loan loss reserve that we took a quarter or two ago on Sunwest of $6 million. Everything else in the loan portfolio is completely performing and doing well.

[Tayo Okusanya:]

Okay. That's helpful. And then the second thing, the transaction you just did with Kindred was the sale of the underperforming SNFs. I mean I always understand why these transactions make sense for you, and I do understand it's accretive to Kindred assets. But I always still scratch my head when they buy something at $58 million and sell it between 10 to 15 million, how that's value adding for anybody?

[Debra Cafaro:]

The Kindred (ph) stock goes up 5 to 10%.

[Tayo Okusanya:]

Right. I mean, could you just kind of help us understand that a little bit better?

[Debra Cafaro:]

Yes, I can help you understand it easily. If Kindred -- assume that Kindred is losing $8 million a year on these assets, which, they lost 2 million in the first quarter, they are negative from an EBITDAR standpoint, even before rent.

[Tayo Okusanya:]

Right.

[Debra Cafaro:]

So Kindred is essentially investing the difference, between 58 million and 15 million, which is $43 million, to get a very significant return, which consists of it stopping losing --.

[Tayo Okusanya:]

Avoiding the loss.

[Debra Cafaro:]

$8 million a year.

[Tayo Okusanya:]

Okay.

[Debra Cafaro:]

So essentially, it's getting an $8 million return on a $43 million investment.

[Tayo Okusanya:]

Got it. Okay.

[Debra Cafaro:]

We all know we've made that investment all day long.

[Tayo Okusanya:]

Got it.

[Debra Cafaro:]

But that's why it worked so well for them.

[Tayo Okusanya:]

Got it, got it. Okay, that's very helpful. Thanks Deb.

[Debra Cafaro:]

You're welcome. Thanks for joining.

[Operator:]

And your next question comes from the line of David AuBuchon from RW Baird. Please proceed.

[David AuBuchon:]

Thank you. Rick, can you review the specific assumptions relative to the Sunrise portfolio? I believe last quarter, you ranged at 110 million to 125 million. And the low end was based off a 150 basis point decline in occupancy and rents and a 2% increase in expenses. It looks like you're running behind on the occupancy and the rents so far, but ahead on expenses. Any sort of commentary regarding your future expectation there?

[Richard Schweinhart:]

David, I think when we look at the Sunrise portfolio and developing the range, we run multiple sensitivities where we consider occupancy, rate and margin and sort of run different sensitivities around those to try to create a box around the range and the things that might have to happen to get to either end of the range. I think as we mentioned, just generally, we expect to see continued softness throughout the year. I think that the first quarter, on an annualized basis, certainly looks good and gets you toward the upper end of the range. Certainly something we would be happy with. And then we've left ourselves room for continued softness in occupancy rate margin through the balance of the year to get to the lower end of the range.

[David AuBuchon:]

Okay. And where are rates today? You mentioned that the occupancy has stabilized in the 87% range, have rents stabilized mark-to-market and I realize there is just one month?

[Richard Schweinhart:]

Yeah, again, I think the rates are relatively consistent with what we're seeing in the first quarter in that $170 range.

[David AuBuchon:]

Okay. And how quickly -- what your sense on a how quickly that portfolio can turn assuming that bought up here and again understanding your guidance for the year, but how quickly do you think that portfolio can turn assuming that the market stay where they are today, the capital markets and the economy starts to push forward again.

[Richard Schweinhart:]

Well, certainly, there is favorable supply demand demographics in the senior housing market generally. There has been limited new supply coming on line over the last few year. And the demographics are only going to continue to drive additional demand. We're also very happy about the fact that these are very high quality assets and high barrier to entry into wealthy markets in major metropolitan areas. And so our hope is that as and when the economy bottoms and turns around and consumer psychology improves to the point where people are more comfortable making major purchase decision that we could see a very healthy rebalance in this portfolio quickly.

[David AuBuchon:]

And are your thoughts regarding the senior housing segment really focused on the higher end? Would you -- assuming that we're going to pass the worst point in this cycle, would you look at acquiring assets in the lower end of that segment?

[Debra Cafaro:]

I just want to be careful about saying assuming we have passed the worst of the cycle, I mean we're not that's not really what our assumptions are because there is a lag in our economy experienced major shock in the fourth quarter 6% (ph) TDP contraction in the first quarter, if you are resident the senior housing asset you are not going to by and large move out but as these shock and major contraction have a lagging effect. And so they can continue to just like unemployment they can continue to affect the fundamental economy for many quarters after those shock and after the stock market improves. And so we're assuming that there will sort of continued economic fundamental weakness throughout the balance of the year in our range, which we kept at 1.10 to 1.45. If things get better, we will certainly be happy and, as Ray said, I think the portfolio will be able to turn relatively quickly because of the positive supply demand and the demographic need-based characteristics of the business. But I do want to be careful about suggesting that we are at an inflection point and all of a sudden we are off to the races. So please take that into account in your thinking about the portfolio and about Ventas.

[David AuBuchon:]

Point taken. I guess what I'm trying to figure out is your interest in this space solely focused on the higher end?

[Debra Cafaro:]

We have assets across the board and we believe that we should play at different price points.

[Raymond Lewis:]

Yeah, David, I think that what we tried do is find assets that are competitive within the markets that they serve. And so finding a good, stable product and a secondary or even tertiary market at appropriate risk adjusted return that has a lower price point to attract residents that are in that marketplace, that's a nice investment for us. Really I think what we're looking for when we look at these deals is, is it the appropriate risk adjusted return for the profile of the asset that we're considering.

[David AuBuchon:]

Okay. And then one more question regarding the MOB port folio, can you just give us a sense of what -- has that portfolio met your expectations so far this year and maybe what you're same-store forecast will be for the balance?

[Raymond Lewis:]

The portfolio is performing well, it's generating stable and consistent cash flows. And we are sort of expecting the future to look a lot like today.

[David AuBuchon:]

Okay, thanks.

[Debra Cafaro:]

Thank you.

[Operator:]

And your next question comes from the line of Rob Mains from Morgan Keegan. Please proceed.

[Robert Mains:]

Good morning. Just got a couple of numbers questions and the guidance please. One is that CapEx figure for the first quarter, should we assume kind of like last year where it ramped up or is that a good run rate?

[Debra Cafaro:]

You should assume a ramp up.

[Robert Mains:]

Okay. And then the line where you've got the adjustments to get from FFO to normalized FFO, Rick said there is 7 million of debt extinguishment its coming. Is there anything else that's going to be larger in that market there because you only had a penny of that in the first quarter?

[Debra Cafaro:]

Right. The categories of things that go in there are tax benefits, merger related costs and expenses which includes the litigation costs and loss on extinguishment of debt. Those are the major items.

[Robert Mains:]

Okay. I can guess which one of those might be going up a year ago (ph). Okay, that's all I have. Thank you.

[Debra Cafaro:]

Thanks Rob.

[Richard Schweinhart:]

Thank you.

[Operator:]

And your next question comes from the line of Jim Sullivan from Green Street Advisors. Please proceed.

[Jim Sullivan:]

Thank you. Can you be more specific about the performance triggers like the Sunrise management contracts, you go 6% to 5%?

[Debra Cafaro:]

We can be more specific, Jim, in conceptual terms, and that is when the assets were first put under management contracts, there was NOI projections that would compound in relation to CPI. And over time, NOI has to meet those levels, or if not, there is a rationing down of the fee in quarter basis point increments to a floor of 5%. And that's how it works and that's why we're getting the benefit of the flex down.

[Richard Schweinhart:]

It's primarily tied to NOI.

[Richard Schweinhart:]

Yes.

[Debra Cafaro:]

Yes, it's tied to NOI and then the percentage change is off revenue because obviously it's a revenue-based fee, but the performance targets are NOI based.

[Jim Sullivan:]

Okay. Sounds like it was a couple of --

[Debra Cafaro:]

Is that clear or did I confuse the issue?

[Jim Sullivan:]

Helpful, but it leads to some follow ups in terms of how they rectify that, i.e. kind of get from 5% back to 6. One would be --

[Debra Cafaro:]

If they perform better.

[Richard Schweinhart:]

It generates more NOI, yeah.

[Jim Sullivan:]

Yeah, I understand that. So specifically interested in what they are doing as far as revenue and what they are doing on the expense side. On the revenue side, what are they doing specifically to stem the occupancy erosion? And I'm interested specifically if they resorted to discounting and perhaps discounting heavily in order to stem the flow of tenants out of the property and get some new tenants in.

[Raymond Lewis:]

Yeah, so Jim, we've spent a lot of time with Sunrise at the beginning of this year to go through a promotional pricing strategy in our assets to make sure that we were discounting the units where it was appropriate to do so. So for instance, a less desirable unit that has been backend for a longer time in a community, might get a discount where a unit that recently emptied, but was an attractive unit, would not. And so what we've tried to do is be thoughtful about discounting, take a disciplined approach and apply consistently across the portfolio and I think it's translating into a pretty good rate and occupancy balance in our portfolio.

[Jim Sullivan:]

When you quote ADR, are you including the discounts?

[Raymond Lewis:]

Yes.

[Debra Cafaro:]

Yes.

[Jim Sullivan:]

Okay. And then another way for them to get from five back to six is on the expense side. What are they cutting specifically in terms of expenses and are those expense savings sustainable or are they expenses that you can achieve when you're running at 87% occupancy, but won't be able to maintain if you get back to 90, 92?

[Raymond Lewis:]

I think as I said, the variable labor controls have been much better in two regards this year. One is a resetting of the standard. And that is the variable labor standard that's applied across all of the communities and what each of the community managers is expected to achieve based on certain occupancies. So they've ratcheted down the standard. And then they've also improved their compliance management with that. So they are measuring it on a daily basis to really get tight on the variable labor expenses, which are one of the largest single expense drivers within a community.

[Jim Sullivan:]

Okay. And then with respect to geographic performance of the Sunrise portfolio. Is there any correlation between the performance of your portfolio and the housing markets that have experienced the most distress?

[Raymond Lewis:]

It's interesting Jim. We actually did some work on that before our call to see if we could draw some conclusion and really in our portfolio we're not seeing any particular correlation between the performance, the occupancy of our asset and the strength of a particular housing market. And I struggle a little bit for a reason for that other than perhaps our properties are generally the best in their market, generally very well located and therefore any impact of a housing is some what muted given the asset quality although that's the only conclusion I could really come up with.

[Jim Sullivan:]

And with respect to CapEx can you remind me what your budgeting CapEx for units in the Sunrise portfolio and if you are rethinking the level of CapEx for '09 in the face of diminished NOI?

[Raymond Lewis:]

I think we have said its going to between 1000 to $1200 per unit some where in the neighborhood $7.5 million a year and we're going to continue to move forward with that. We want to make sure that we're investing in our community to keep them competitive, to keep them fresh and make sure that we're well positioned to take advantage of the market rebound that we talked about earlier.

[Jim Sullivan:]

Okay. And then finally you're still showing 2 million in the quarter I think for merger-related costs is that all related to the litigation?

[Debra Cafaro:]

Substantially.

[Jim Sullivan:]

Okay. Thank you.

[Debra Cafaro:]

Thank you

[Operator:]

And your next question comes from the line of Jacob Strauss Water from Broadlink Capital. Please proceed.

[Unidentified Analyst:]

Hi good morning.

[Debra Cafaro:]

Hi Jacob.

[Unidentified Analyst:]

Can you help me by repeating the debt that you brought back over the quarter?

[Debra Cafaro:]

Yes. And we have released out a tender release, but we've brought back 306 million in principal amount, about 100 million -- I am rounding -- about 100 million of 10, about 104 million of the 12 and about 98 million of the 14 and we also paid off all of the nine.

[Unidentified Analyst:]

Thank you very much.

[Debra Cafaro:]

You're welcome.

[Unidentified Analyst:]

One other quick question. Are you seeing buildings trade, if you are, is there a cap rate in the industry right now that you're seeing?

[Debra Cafaro:]

Well there is a limited amount of data on transactions.

[Unidentified Analyst:]

So does that give you an ability to guide to me to a range --

[Debra Cafaro:]

I will hereby create a market. So it's hard to provide cap rate guidance to you in the absence of transactions. Most people are trying to triangulate with historical cap rates and debt rates that cause right now. But hopefully at some point, things will start to try loose and we'll be able to give you a better insurance more specificity.

[Unidentified Analyst:]

Thank you.

[Debra Cafaro:]

Thank you. So Kameesha, do we have any further questions?

[Operator:]

At this time, there are no questions in queue.

[Debra Cafaro:]

Okay. Well, I want to thank everyone for joining us this morning and I want to leave you where we started, which is that things are good at Ventas and we very much appreciate your participation and we look forward to seeing everyone at NAREIT in June. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.