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Edited Transcript of VTR earnings conference call or presentation 25-Oct-19 2:00pm GMT

Q3 2019 Ventas Inc Earnings Call

Chicago Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Ventas Inc earnings conference call or presentation Friday, October 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Debra A. Cafaro

Ventas, Inc. - Chairman & CEO

* John D. Cobb

Ventas, Inc. - Executive VP & CIO

* Juan Sanabria

Ventas, Inc. - VP of IR

* Robert F. Probst

Ventas, Inc. - Executive VP & CFO

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Ventas Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Juan Sanabria, Vice President of Investor Relations. Thank you. Please go ahead.

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Juan Sanabria, Ventas, Inc. - VP of IR [2]

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Thanks, Norma. Good morning, and welcome to the Ventas conference call to review the company's announcements today regarding its results for the quarter ended September 30, 2019. 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 law. 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 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 31, 2018, 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 A. Cafaro, Chairman and CEO of the company.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [3]

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Thanks, Juan, and good morning to all of our shareholders and other participants. Welcome to the third quarter 2019 earnings call. I'm joined on today's call by my valued Ventas colleagues as we discuss our strong enterprise results in the quarter and other recent highlights, including the closing of our Le Groupe Maurice partnership; accelerating investment into our future growth, primarily in our Research & Innovation business; and our environmental, social and governance leadership that is highlighted in our 2019 corporate sustainability report released today. I'll also address the lower-than-expected third quarter performance of our senior housing operating portfolio and its forward implications for us in the context of very positive-leading indicators in the business. It is very heartening to see that construction starts of new senior living communities this quarter, especially in assisted living, were the lowest they've been in 9 years and that demand for senior living is growing at its highest level on record.

Starting with our third quarter results, I'm very pleased to report a strong quarter of normalized FFO, $0.96 per share. Our performance was driven by accretive investments, excellent capital markets activity and growth in our Office and triple-net leased business.

We've also refined our full year normalized FFO per share guidance range to $3.81 to $3.85 per share, maintaining our midpoint at $3.83 per share. This expected outcome for 2019 is also consistent with the upper half of the normalized FFO guidance range we initiated in the first quarter of this year.

Ventas is benefiting significantly from our diversified portfolio and our effective investment in capital markets activity. Indeed, in the quarter, the 70% of our same-store portfolio represented by our Office, triple-net lease and Canadian senior housing portfolios grew cash NOI by nearly 3%.

However, in our U.S. SHOP business, which represents 25% of our enterprise, we experienced dynamic operating conditions in the quarter. And occupancy took a precipitous leg down at the end of September. Thus, as Bob will address in more detail, we expect our 2019 SHOP performance to fall below our original guidance range, mostly because our portfolio did not experience the strong seasonal lift in occupancy that is typical and rate softness continued during the quarter. These trends are continuing into the fourth quarter, leading to a reduction in our full year SHOP 2019 guidance. Because we will end 2019 and enter 2020 off a lower base, we've also concluded that our enterprise growth will be deferred until after 2020.

While we are very disappointed in this deferral of our growth expectations, the team is resolute and focused on closing out the year by delivering the solid 2019 enterprise results we've outlined today. Additionally, we intend to make necessary adjustments and decisions that will improve performance and position us to capture the powerful upside that remains ahead in senior housing. At the same time, we will continue to invest in our future, be good partners, stay productive and focus on delivering value for our shareholders from the strong diversified business we have built.

We expect to provide you with 2020 guidance and the components thereof in the first quarter consistent with our historic practice. Among other things, our guidance in senior housing will be predicated on our review of operator budgets, how the year ends and the impact of January 1 rate increases.

Before Bob addresses senior housing in greater detail, I'd like to highlight our accretive and attractive investment activities and our ESG achievements. Within the $3.8 billion of consolidated investments we've made year-to-date, we were delighted to close on our new partnership with Montreal-based Le Groupe Maurice in the third quarter with its prized portfolio of 29 new high-quality apartment-like senior housing communities and 5 in-progress developments, valued at USD 1.8 billion. The LGM transaction and integration have gone exceedingly well and performance is in line with our expectations.

To our new partners north of the border, we thank you for choosing Ventas as your partner, and we congratulate you on your success in maintaining your company and well-regarded brand and positioning LGM for continued sustainable growth.

We've also made great progress on our $1.5 billion university-based Research & Innovation development pipeline as we continue to build this exciting business with our best-in-class development partner Wexford. Among our key accomplishments in the quarter were execution of a 30-year lease with Drexel University for its new school of Nursing and Health Professions, with an expected yield of nearly 10% and the expansion of our footprint in the burgeoning uCity market, where our assets are currently 98% occupied. The acquired assets increased our developable square footage in the uCity submarket of Philadelphia to 4 million square feet, net of our One uCity and Drexel development.

The Ventas team is also aiming to close and commence several more R&I projects in the pipeline over the next several quarters.

In sum, we are pleased with our year-to-date investment quality and volume as we continue to improve our portfolio and invest in our future. Finally, we significantly elevated our environmental, social and governance profile.

Our long-standing ESG efforts are organized around 3 key pillars of people, planet and performance, and we are pleased that our ESG leadership has been repeatedly recognized by several prestigious organizations. Today, we released our 2019 corporate sustainability report that catalogs our ESG achievements and aspirations. We will continue our focused improvement in ESG areas that also support our business success.

In closing, over the past 2 decades, Ventas has experienced incredible business success and outperformance, punctuated by periodic setbacks. Yet with integrity, positivity, skill, focus and teamwork, we've always been able to rally back stronger than ever, and today is no exception.

With that, I'm pleased to turn the call over to our CFO, Bob Probst.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [4]

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Thanks, Debbie. I'm going to start by diving straight into our third quarter results for our SHOP segment, which represents 33% of our NOI.

SHOP same-store cash NOI in Q3 decreased 5% versus prior year, a disappointing result that fell short of our expectations. This result was led by revenue weakness from the cumulative effect of new openings in a dynamic competitive market.

I'd highlight 3 primary drivers versus our expectations. First, though Q3 average occupancy grew sequentially to 86.7%, we did not see the expected typical seasonal occupancy lift. Therefore, the occupancy gap versus prior year widened from the second to the third quarter by 30 basis points to an average 70 basis point occupancy gap.

Intra quarter, the year-over-year occupancy gap widened sharply in September, with September period-end occupancy approximately 115 basis points lower than prior year.

Second, price competition driven by new supply was significant in pursuit of new residents in select geographies, most notably in secondary markets. Negative releasing spreads in our portfolio widened in Q3, instead of our expectation that they would tighten relative to prior year. As a result, REVPOR growth reduced sequentially from 60 basis points in the second quarter to 40 basis points in the third quarter year-over-year.

And third, ESL experienced discrete pricing challenges exacerbated by new supply. Corrective action plans are in progress. I would note that, excluding ESL, our Q3 SHOP same-store NOI performance would improve by over 100 basis points.

In light of Q3 revenue trends and a lower occupancy start point entering the fourth quarter, our operators' plans call for aggressive pricing actions in pursuit of occupancy as we close out the year and set the base for 2020. We are also evaluating actions at the Ventas level to improve SHOP performance, including selective dispositions and/or capital investments.

Turning to expenses and on a positive note, operating expenses grew a modest 1.8% in the third quarter. Our operators continue to mitigate wage pressures by jointly managing staffing and driving efficiencies in indirect costs. I'd also highlight our Canadian portfolio, which increased occupancy 40 basis points to 94.2% and grew NOI at a robust 4.7%. This performance underscores the health of the Canadian senior housing market, which now represents nearly 25% of the SHOP portfolio NOI post our closing of LGM.

Given third quarter results, we're revising our SHOP full year 2019 same-store cash NOI guidance to now range from minus 4% to minus 5%. The guidance range implies a challenging fourth quarter given Q3 trends, a dynamic and competitive market and lower occupancy levels entering the fourth quarter. We do see upside in senior housing in the U.S., given record levels of demand in Q3, a continued positive trend in new starts and attractive demographics.

Let's move on to our exciting Office segment, which is approaching 30% of our NOI and currently represents over 26 million square feet. Our overall Office segment delivered attractive same-store cash NOI growth of 3.7% in the third quarter. And with year-to-date Office growth of 2.9%, we're pleased to improve our full year Office same-store guidance. More on that in a minute.

Our R&I business, which now exceeds 6 million square feet, led the way for Office in the third quarter, increasing same-store cash NOI by a stellar 10.6%. Occupancy increased 290 basis points on strong lease-up at our Wake Forest assets, while revenue per occupied square foot increased 7.6%.

Our 4220 Duncan development in the Cortex Innovation Community associated with WashU in St. Louis is now at 100% occupancy after only 16 months of operation, bringing Ventas' 5 in-place cortex buildings to 99% occupancy overall, with a pipeline of incremental demand.

R&I also benefited by a lease termination fee in Q3 in its non-same-store portfolio of $4.7 million of NOI or slightly more than $0.01 of FFO.

Turning to our 20 million square foot medical office business. MOB same-store NOI increased by a steady 1.6% in the third quarter. Operating expenses increased by just 20 basis points year-over-year in Q3, benefiting in part from utility savings arising from sustainability investments. We've seen a meaningful improvement in our MOB tenant satisfaction scores, while our trailing 12-month MOB tenant retention ratio improved to the company's highest on record.

These Office results are proof points of the various operational best-practice initiatives Ventas is successfully implementing under Pete Bulgarelli's leadership that will drive sustainable growing cash flows.

On the heels of strong year-to-date results, we are pleased to raise our full year 2019 Office same-store NOI guidance to now range from 2% to 2.5%, driven principally by better-than-expected strength in R&I.

On to triple-net, where same-store cash NOI increased by 2.1% for the third quarter, driven by annual rent escalators across our diversified portfolio. Trailing 12-month [EBITDARM] cash flow coverage for our overall stabilized triple-net lease portfolio for the second quarter of 2019, the latest available information, was stable at 1.5x. Coverage in our triple-net seniors housing, post-acute and health system assets also held firm with prior quarter.

I would highlight the continued strong performance by Ardent for that Ventas-owned assets and for the enterprise overall. We are still on track with the approximately $10 million net NOI impact from proactively addressing leases with select lower credit triple-net senior housing operators. This impact appears in non-same-store results. As a result of year-to-date growth of 2.3% from the triple-net full year same-store pool, we're raising our full year 2019 same-store cash NOI triple-net guidance to now range from 2% to 2.5%.

Turning back to enterprise results, normalized FFO per share in the third quarter was a solid $0.96. The FFO performance versus 2018 was flat year-over-year adjusted for the $0.03 per share cash fee received in the third quarter of 2018 related to the Kindred go-private transaction.

We were active in the debt capital markets in the third quarter. We extended our average debt maturity to nearly 7 years and managed interest rate risk via issuance of $650 million of 3% senior notes due 2030, which were used to retire $600 million of 4.25% notes due 2022. To manage currency risk from the close of the LGM transaction, we also closed the CAD 500 million unsecured bank term loan at attractive pricing.

Our net debt to adjusted EBITDA ratio is 5.9x at quarter end. As expected, leverage increased sequentially from the second quarter as we raised equity in Q2 to fund the LGM deal, which closed in Q3.

I'll finish the prepared remarks with guidance. At this late stage in the year, we're narrowing our normalized FFO per share outlook for the full year 2019 to now range from $3.81 to $3.85. The guidance midpoint of $3.83 is in line with our guidance range from the second quarter call and at the higher end of our initial guidance range provided in February of $3.75 to $3.85 per share. We've also narrowed our overall portfolio of same-store cash NOI growth guidance for 2019 to now range from 0% to up 30 basis points, taking into account an increased guidance range on our triple-net and Office portfolios and the reduction in SHOP. Other assumptions underpinning our FFO guidance are largely the same as last quarter. Guidance includes the impacts of announced investments and capital markets activity to date. To close, the whole Ventas team is resolute in taking actions that will improve performance and deliver growth and value for the benefit of all of our stakeholders.

With that, I'll hand it to the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nick Yulico of Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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I guess first question is, you had the commentary, Debbie, in the press release about you thinking now your return to enterprise growth will occur after 2020. Are we to read into that, that you're not expecting FFO growth next year?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [3]

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Directionally, yes. We think that the growth will be deferred past 2020.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And then, I guess, as we think about this year, you had an Investor Day where you were pretty positive. You now had a tough quarter for seniors housing. Can you just remind us how often are you getting updates from your senior housing operators on the performance of your assets? And then specifically, besides what you cited about potential sales of assets, what are the steps you've taken to address the issue that you're facing right now in senior housing? Is it an operator issue? Is there something better that you can do in terms of predicting that business? That'd be helpful.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [5]

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Sure, Nick. It's Bob. Let me start with the cadence of conversations with the operator, which I would describe as very regular. Our asset management teams are in, [I don't call it,] constant contact with our operators. But absolutely, the fact is the market changed pretty rapidly in the third quarter and even the boots on the ground, as I described, the operators were surprised by the nature of the change and particularly the occupancy trend in September, which we highlighted in the prepared remarks. And so it's really that dislocation as we then review the outlook, the entry into Q4, the outlook for the year, that change, and those circumstances changes pretty rapidly.

So what are we doing about it? The second part of the question. Certainly, at an operational level, all the operators are actively engaged in, I'd call them, asset-by-asset recovery plans, very much focused on revenue, and we continue to engage with them on that. At a portfolio level, clearly, there are different options we have, including selective dispositions of potential underperformers as we look forward and see the profile in various submarkets. Capital investments, clearly, as we think about ways to continue to compete to be competitive in select markets and continue to invest behind opportunities that drive growth. So it's the same playbook as you would expect. And I'd say, the frequency of dialogue is very, very regular.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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I guess just -- that's helpful. I guess just one follow-up there is that, I mean, you talked about, Bob, that negative leasing spreads widened in the quarter instead of tightening, which you were forecasting a tightening, what gave you confidence to forecast a tightening? Was that something you were seeing? Is that something your operators were telling you? And how do you end up seeing that negative surprise in the quarter?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [7]

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Great. So if you back up to our guidance early in the year and then reaffirmed last quarter, in the last half of last year, the second half of last year 2018, we did see aggressive price discounting, and we saw the releasing spreads widen in the second half as a consequence, and we saw occupancy sequentially grow nearly 80 basis points in the third quarter last year. So that was the backdrop. In that context, all of our operators consistently believed the ability to price, I'd say, more surgically in this second half, and therefore, not have a significant discounting environment and have an improved, narrowed releasing spread. That was the predicate of the prior guidance. What indeed has happened and it's really, I call it, the cumulative effect of the openings that have been coming online over the course of time, has driven that to be more price-competitive, more widespread in the discounting. And therefore, as you see in our rate, sequentially, a softening in REVPOR as opposed to growth and a year-over-year wider releasing spread rather than narrower. So fundamentally, in the third quarter, that was a change both in the market and versus our expectation.

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Operator [8]

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Our next question comes from Nick Joseph with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [9]

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It's Michael Bilerman here with Nick. So as sort of piecing some things together, backing away from the growth for next year, how much of that is the weaker 3Q and 4Q results playing into the run rate versus the expectation that same-store NOI for SHOP because it appears that the [rest part] of your businesses, which is almost 2/3 of the company are doing fine and are actually probably in line to ahead of where your expectations are. So how much of this shift is due to the run rate versus the expectation that SHOP is going to be negative again in 2020, off of a down, call it, 5% this year?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [10]

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Yes. I mean, Michael, thanks for your question. I'm not sure I totally understand it, but in terms of...

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [11]

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I guess maybe just from the standpoint of -- the Street right now is at $3.93, you're going to do $3.83 for earnings this year, right? So the Street was expecting up $0.10, which is probably somewhere realm of where you thought you were going to get growth in FFO. Now you're saying you're not going to have FFO growth and there's 2 parts to it, right? It's getting slower into the year because you've had very weak SHOP results. So the run rate is lower, that accounts for, I don't know if that's $0.05 or $0.10. And in addition, I don't know how much cadence you have for 2020 SHOP, and I know you're not giving 2020 guidance. But I don't know how much of your perspectives have changed in making the statement that you're going to defer the earnings growth, right? So arguably, the number for next year is going to be below $3.83. And I'm just trying to piece together how much of that is the weakness that you have in the second half of this year, what you experienced in the third quarter and you're forecasting in the fourth quarter. And how much of it is a change to how you're looking at 2020?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [12]

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Okay. I mean basically what we want to do is address 2020 and our guidance and all the components when we normally do in the first quarter. And when we do that, we want to have some of the key underpinnings of that, including the 2020 budget, the rate letters and so on and see where we end the year. So I would just defer that conversation. We want to give you the guidance and the parts when the guidance is ready and reliable for 2020, and that will be in the first quarter.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [13]

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Maybe we can address it this way. So you have an implied fourth quarter guidance of $0.88 to $0.94, right, based on what you provided for the full year and where you have year-to-date. That $0.88 to $0.94 is down from the $0.96, $0.97 that you've experienced in the prior 2 quarters. Still a pretty big range, right, $0.06 is you're talking about 6%, 7% in terms a range for the fourth quarter, and one would have imagined you would have gotten the benefit of all the investments -- accretive investments that you've made and closed recently. So maybe, Bob, you can walk through the delta of getting from 3Q reported FFO of $0.96 down to that $0.88 to $0.94, a same-store is effectively from what we can tell, implying SHOP down about 4% sequentially, down about 7.5% year-over-year based on your guidance numbers, which would only be a couple of pennies. So maybe we can start talking about that part.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [14]

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Yes. Well, I'll also address a bit of your first question. The lower finishing point to this year as now embedded in our outlook and the implication for, therefore, 2020 is real. I mean the start point of where you finish, as we're seeing in the fourth quarter, fundamentally determines where we are in 2020 and we've lowered that start point. So that's a fundamental input, obviously, into 2020.

The -- let's use the midpoint for easy math sequentially. The second part of your question, which is a $0.96 in third quarter becomes $0.91 or $0.92 with rounding, depending if you round up or round down in the fourth. And what's driving that? And number one, most notably, is SHOP and property, and that is the largest driver. We highlighted in the third quarter, we also had a term fee in R&I of roughly $0.01. And between those 2 things, therefore, property and that term fee, you bridge the gap. So that's a sequential midpoint description. And again, the range is really predicated, principally, on the SHOP revenue outturn in the fourth quarter.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [15]

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But you should get the benefit of applying...

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [16]

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Hopefully, that's more helpful than my answer to you.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [17]

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Yes. And I understand that the ones that go down, SHOP and the lease term fee, but you bought a significant amount of assets, you did the loan on Colony, you raised equity in June that was accretive. Like all of that should -- you did debt refinancing. All that should help sequentially, no?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [18]

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Well, so, I mean, Colony was in the third and Le Groupe Maurice is expected to be breakeven in 2019. So I think your -- those are reflected. And so Bob's simplification of third to fourth is -- represents the principal drivers.

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Operator [19]

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Our next question comes from Vikram Malhotra of Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [20]

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I have 2 questions. So just first, going back to the question on FFO growth, I'm still not understanding if you're benefiting. I get Maurice is not a positive this year, but it should be a positive next year. Colony should be a positive next year. Your [O&I] and Office and MOB should all be a positive next year. So effectively, I'm not sure how you're projecting SHOP into 2020 right now to come to no growth if in the third quarter itself things are so volatile and it's just tough to get a near-term read, I'm not sure how you're forecasting into 2020 what it looked like? So if you could just walk us through to get to that no growth in FFO? Like what's -- in that statement, what's embedded in SHOP for next year?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [21]

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Well, I'd really be delighted to do that, and we are going to do that in a disciplined way with all the components when we give our 2020 guidance as we historically have done in the first quarter. And so I know I'm asking you to be patient with us, but that is the disciplined process that we have historically gone through after we see how the year ends. We want the guidance to be ready and reliable. And so I would encourage us to talk about it when we give 2020 guidance in the first quarter with all the parts that you're looking for.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [22]

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Okay. Fair enough. But just because you said no FFO growth, then obviously, people are going to question. So fair enough, we'll wait for the details.

The second question really is just around the SHOP -- the changes that you're articulating in senior housing, and there are 2 parts, if you can bear with me. One on the SHOP side, it's obvious that there's probably a need for more real-time data or maybe faster data because things could be so volatile as they were in Q3. So apart from, like, longer-term things, like, putting in CapEx, et cetera, and selling assets, like, what can you do or what are you contemplating to get data in a more real-time manner in the SHOP side? And then on the triple-net side, if you can address this, you've baked in $10 million of potential restructurings, but if you look at the EBITDAR and in-place EBITDAR, I'm assuming, is well below 1. I know you have several years on some of your leases, but how should we get comfortable that additional lease restructurings will not be required in 2020 and 2021?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [23]

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Yes. I'll take the first. So a reminder, obviously, we are reliant in the SHOP business on the data from our operators. As you speak to real time, that is, by definition, coming through our operators, and therefore, there is, by definition, going to be some timing between their receipt of that and ours. I would say, the clock speed is pretty good. That said, there are indicators, which is -- such as occupancy, which one can see more, call it, weekly. On the other hand, things like REVPOR and your OpEx really are both intra-quarter quite dynamic, but also you really need to see the whole quarter play out before you can get a strong beat on it. So I would agree fully that data continues to be in the industry a challenging one that we continually endeavor to get better on. But in some cases, such as NOI and OpEx, you really need to see it through the quarter. Debbie, do you want to take the second?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [24]

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Yes. In terms of the triple-net portfolio, we've given our expectations for 2019 with approximately a net $10 million impact. We're materially on track for that. In terms of looking forward, again, that's a part of the 2020 guidance that we want to provide to you when we provide all of our guidance and we have a significant amount of our triple-net senior housing tenants, the likes of Brookdale, which is the largest one, which obviously has a very significant ability to pay rent and that's a large portion of the senior housing triple-net and many other operators who have other credit and/or coverage where we feel comfortable with the go-forward rent obligations.

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Operator [25]

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And our next question comes from Rich Anderson of SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [26]

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So I know -- just out of curiosity, I know you typically wait till the first quarter for guidance, but these aren't typical times, I guess, and I wonder if you would give any thought to maybe being a little bit early in that process, say, pre-end of the year to provide an outlook into 2020 sooner than later just because of the uniqueness of the situation. I would just offer that as a suggestion, but not a question. My question really is, 4% to 6% for the 5 years, how much is that disrupted from your Investor Day? Do we assume that is a different range going forward? Or do you stand by the 5-year outlook still?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [27]

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Yes. Thanks, Rich. I'll let Bob follow on. But basically, right now, our real focus is closing out 2019 in the way that we've outlined here today, taking steps to improve performance and also position us for the upside in senior housing, obviously, to the extent that -- and we want to get a good 2020, and we want to have it be given to you, which you deserve when it's ready and it's reliable. And there are many inputs that will go into that. And so obviously, to the extent that our 2020 outlook has changed due to changing circumstances, that would have implications for the 5-year outlook. So let's start with getting you a good 2020 that you can feel good about.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [28]

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Okay. Bob, are you going to add something I missed, I didn't know.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [29]

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No, no.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [30]

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Okay. And then lastly, you'd said the market changed dramatically in the third quarter, and I'm curious as to perhaps why? The supply has been high but hasn't really changed much from the second to the third quarter. I guess you're saying the behaviors of your competition have changed and would you say that this is perhaps a condition of the geographical footprint of yourself? Or do you feel like this is more of a holistic sort of national conversation?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [31]

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Yes. Well, you rightly say, we knew supply was coming. That's not news to us. I think it's the cumulative impact of what we've been seeing over the last years, which seems to have taken a bigger impact, made the market tougher, particularly on selling. And then within that, how our operators and others compete particularly on price. It seems to have become tougher in the quarter. It is clearly, thematically, when you look at the NIC data, which, again, is the only industry data that we see. There was some sequential occupancy growth. Ours, in fact, was better than that when you look Q2 to Q3, but both pricing as measured by NIC and occupancy continues to be flattish or challenged. So without better industry data than that, it's hard to say really overall for the market, but certainly, in our portfolio, in the markets in which we compete, we did see a change. And how we need to compete into that needs to change.

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Operator [32]

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(Operator Instructions) Our next question comes from Michael Carroll of RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Bob, I just kind of want to dive into that last question that Rich had related to the impacts of supply. Was there more supply delivered this quarter? Or was the issue that your competitors were just more aggressive on price and Ventas was not and you lost more occupancy relative to those competitors?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [34]

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Yes. Well, it's always important to note that the openings in a quarter, though important, it's not a flash to bang that's immediate. It takes time for those to lease up. And historically, we've talked about 18 to 24 months. I don't know if that rule of thumb applies anymore, simply because the cumulative amount of new openings has been so significant over the last couple of years. So I would not -- I would point to the cumulative impact as opposed to some elevation in the quarter itself.

Then how folks compete? By definition, new openings come in the market, in the submarket. The whole submarket for those existing operators will see an occupancy drop. It's kind of on a pro-rata basis. It's then how do you complete within that? And I would say, in certain geographies, we did lose share, I think it's fair to say. And hence, back to the asset-by-asset view of how do we compete and pricing within that, most notably. And secondary markets, if I were to point to markets, where we saw -- again, these are perhaps more price-sensitive markets as well, but also where the deliveries came first. That is where we're seeing the greatest price competition and the greatest impact on REVPOR, the releasing spread and NOI. So hopefully, that answers your question.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Yes. And then what -- I guess, talking about the -- I think the changes that, I think, Debbie made in her prepared remarks, and I think that you referred to in the Q&A also. I guess what specific changes is Ventas pursuing? I think the ones that you highlighted seems like stuff that the company has always done -- investing in the properties and pursuing, I guess, pruning. Are you planning on cutting rate also to gain more occupancy? Is that one of the more meaningful changes?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [36]

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Yes, Mike. I'll call it, the operational strategy certainly incorporates more aggressive pricing in the fourth quarter in an effort to win that resident. And so that is definitely in the plans as distinguished by what I'll call them at the overall portfolio level, actions that we can take which you rightly mentioned. So at the operating level, at the asset level, pricing is critical for us to compete and change the trajectory.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Okay. And then were you surprised that operator started offering more concessions, I think that -- I believe, Ventas has mentioned and obviously other REITs and operators have said that the market has been fairly disciplined in not offerings those concessions, Has something changed this quarter versus prior quarters?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [38]

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Yes, by definition, and that was one of the 3 predicates of why the guidance is different for us than our assumption. Again, last -- second half of last year, more widespread discounting, expectation by our operators and us and others, I believe that, that would be more targeted in the third quarter, in the back half of this year. And that's not what we're seeing -- quite the opposite, a widening in a more competitive market in the pricing. So quite different.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [39]

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Right. And as a result, even though sequentially we grow more than NIC in the third quarter, we did not build occupancy with the seasonal lift and power that we would typically see as a result.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [40]

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Right. Hence, widening the gap year-over-year.

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Operator [41]

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And our next question comes from Jordan Sadler of KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [42]

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I'm not going to beat a dead horse. Can you -- can we switch over to the triple-net portfolio? The same-store NOI growth there, guidance for the full year moved up pretty significantly by about 125 basis points, I think, Bob, at the midpoint. What's sort of that driving the change there? I feel that's like a pretty stable predictable business.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [43]

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So we're still alive and kicking. So you're not beating a dead horse. In terms of triple net, I would just say that as we said at the beginning of the year and in Bob's remarks that some of the -- all of the $10 million net impact in NOI on the discrete set of assets that we've talked about is in non-same-store and FFO, and therefore, outside of the triple-net pool. And we had talked about that, I think, at the beginning of the year when we made the simplifying assumption around the net $10 million.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [44]

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Okay. So the $10 million was previously in and now that's out. Did I get that right?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [45]

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It was -- remember, we talked about it being a simplifying assumption within, but we've noted that if there were dispositions or transitions, then it moves to another category and that's what we've called out this quarter.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [46]

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Right.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [47]

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Okay. So that's out. How much of the $10 million in adjustments is crystallized? At this point last quarter, I think you'd said $3 million, Bob. And then what's the annualized impact of the total $10 million as we go forward?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [48]

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Yes, Jordan. Yes, to keep it simple, I'd say, the fourth quarter impact is approximately $4 million, and $10 million is the 2019 impact.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [49]

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But if I think about the annualized impact of the $10 million adjustment, so the incremental adjustment to 2020, for example, the annualized impact from the $10 million of adjustments will be $25 million, so an incremental $15 million to next year?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [50]

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I'm not sure how you got that number.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [51]

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Annualized -- is the $10 million an annualized number or is [it the adjustment in] the year?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [52]

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No.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [53]

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No. It's a 2019 number, and it started in the back half of the year principally and is $4 million in the fourth. That's not an annualized number.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [54]

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Right. So I'm just curious if you annualized, what the rent adjustments were, right? So annualized rents are falling by a total of $25 million as a result of those adjustments? Or -- it has to be more than $10 million, obviously, right?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [55]

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Yes. Correct. And it's sort of a [spare base] you can annualize $4 million.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [56]

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Okay. That's just -- okay. And then the other guidance thing that I noticed in the guidance was that previously you had maintained that there were no changes to the holiday lease contemplated in guidance. Is that still the same?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [57]

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Yes.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [58]

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Yes.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [59]

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Okay. I just didn't see that called out. And then lastly, on the balance sheet, leverage at 5.9x, did you guys look to the ATM at all in the quarter or since quarter end? And then how should we be thinking about the balance sheet going forward, Bob?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [60]

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Yes. So 5.9x, really a function of the close of LGM in the quarter. So very much as anticipated, very much within the range of 5x to 6x that we've operated within a long time. So we're quite comfortable there. We did not incrementally do ATM in the quarter. We had last earnings call described a little that we did early on in the third quarter, but we didn't do any after that, simply we didn't have uses. So that's the rationale. But we're very -- we're comfortable with where we are.

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Operator [61]

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(Operator Instructions) Our next question is from Steve Sakwa of Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [62]

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Debbie and Bob, I just wanted to maybe switch to expenses in the SHOP portfolio and just sort of what you're experiencing on the labor front and sort of how you maybe see that trending as a positive, negative or kind of maybe consistent moving forward?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [63]

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Yes, Steve. So a nice thing to talk about. I'm happy to talk about the OpEX. We grew OpEx year-on-year in the third by 1.8%. What continues clearly is underlying wage pressure kind of mid-single-digit sort of range when you look at a per hour basis. And we've described how consistently we've been able to manage that number by staffing operating model at the asset level, procurements and managing indirect costs, and as a consequence, keeping that overall growth below 2. And that is year-to-date pretty consistently what we've seen across the portfolio. Now clearly if and if the economy continues as is and there's continued labor pressure in wages in the mid-single digits range, we'll need to run that same playbook to keep the OpEx in the range that we've had. But it's been -- I give lots of credit to our operators, doing a fantastic job on managing the OpEx base and keeping that below the inflation.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [64]

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Okay. And I guess, the second question on the R&I business, Debbie, as you sort of look out, just sort of the opportunity set today, I mean, how would you sort of describe it versus 3 to 6 months ago?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [65]

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I'm going to turn it over to my colleague, John Cobb, who is on the ground, our Chief Investment Officer.

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John D. Cobb, Ventas, Inc. - Executive VP & CIO [66]

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Sure. This is John. I mean, I think what we're seeing is, we're seeing our pipeline is still good on the development side with our friends at Wexford. We're seeing lots of activity and so forth there. We're still looking at a fair amount of acquisitions in both core markets and also in our university markets. Those have become a little bit more competitive, but we're definitely seeing a fair amount of activity.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [67]

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We have a great competitive position in the University Research & Innovation business and John and the team are doing everything humanly possible to maximize that competitive advantage that we have.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [68]

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I guess just to quickly follow up on the competitive nature, and it sounds like on the acquisition front, is it new players coming into the business? Or just trying to get a little more color on maybe what's happening to pricing on those assets?

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John D. Cobb, Ventas, Inc. - Executive VP & CIO [69]

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I mean there's been some new competitors. There's always been competitors in all the industries that we play in. It just happens to be a, there's a little bit right now in life science, a couple private equity firms have formed some funds. But it's no different than, I would say, the last 6 months. I mean it's always been competitive, it's just become a little bit more price compression.

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Operator [70]

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And our next question comes from Joshua Dennerlein of Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [71]

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In the opening statements, one of you mentioned ESL was weaker than expected and if you remove that, it would be about 100 basis points. If I heard that correctly? Can you maybe give some more color on what's going on there? And if that's just for them or their markets or...?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [72]

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Yes. So you're right. We did call out a 100 basis point impact to the Q3 results from ESL. Thematically, what drove the ESL result is not different than what I talked about overall in terms of occupancy and pricing. I'd say, a couple of things that are unique or discrete in this case. One is the footprint, which tends to be more secondary tertiary markets. And 2 is, ESL still, I would say, in the process of implementing new models as it has had these assets and taking them over, including a new pricing model, which in the midst of in the context of the tough market, made it even tougher for ESL in particular, but generally, thematically, the drivers are the same.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [73]

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Okay. And are the drivers that were impacting SHOP this quarter consistent with what was going on in the net lease senior housing portfolio? Just trying to get a sense of where like 3Q '19's coverage ratio might shake out and maybe the evolution kind of going forward? Like should we expect that to trend closer to 1 or maintain the 1.1?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [74]

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Well, I would say, the industry irregardless of or irrespective of business model is the industry. So to the extent that the triple-net operators are seeing the same market conditions and cash flow of the assets has a similar profile, then yes, that would have an impact on coverage. As you know, we report on a delayed basis in terms of coverage, we haven't got yet the results from all our operators for triple-net. So too early to say. But clearly, the underlying market is what drives ultimately that number.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [75]

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Okay. And you're still confident that those coverage ratios over time would kind of be in a comfort range where you feel like the leases could kind of consist as they are? Or at what point would you like consider taking action?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [76]

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Well, again, I would say in a normal market if you're looking at EBITDARM coverages over a long period of time, you would want to see those in the 1.2 to 1.3 range, maybe 1.1 to 1.3, which is where we are. Over time, it really depends how you address different things depending on what the circumstances are, what the credit is, whether it's -- whether they're pooled leases, what other credit supports you may have and so on. And those really determine how you would approach the situation if coverage becomes more compressed. We've talked about how we've addressed the discrete pool of those in 2019, and I think very effectively. And that the largest percentage of this pool of triple-net senior housing operators, we're quite comfortable with.

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Operator [77]

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And our next question comes from John Kim of BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [78]

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A question on the lack of enterprise growth next year. Does this contemplate major disposition, shrinking the company at all or any significant amount of operator transitions?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [79]

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It's a fairly steady-state look.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [80]

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Okay. It still seems difficult to get to that lack of earnings growth. I mean I think this question was asked earlier, but are there -- is there going to be another significant rent release that you have similar to the $10 million that you had this year, and it looks like, for instance, on the LTAC, the triple-net coverage went down a notch. I'm wondering if that's also part of your guidance.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [81]

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Yes. I'll touch on the LTAC one. The LTAC was literally a matter of basis points that made the round change, driven by both rent and the asset performance. But it's literally a round. So there's no fundamental change in the LTACs.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [82]

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Okay. Second question is just a follow-up on ESL. It still seems like the 100 basis point impact on your SHOP is pretty significant given the size of ESL. Can you just verify how significant they are as part of your SHOP -- same-store SHOP portfolio? And any parameters on how significant the performance was?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [83]

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Yes. Roughly 10% round numbers, a little bit less of the SHOP portfolio is what they represent. Clearly, as you say, a 100 basis points is a big impact. And so that year-over-year performance is double digits down. It's just by the definition, the math. So quite materially and -- quite material and quite notable. But again, it comes back to the same drivers. I would highlight again, secondary and tertiary type business model, slightly slower margins as a consequence of lower REVPOR in dollars, so a bit more operating leverage as well.

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Operator [84]

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(Operator Instructions) Our next question comes from Steve Valiquette of Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [85]

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So just a few more question here on senior housing pricing dynamics. I guess I'm curious, were there 1 or 2 operators, in particular, that maybe trigger some of the more aggressive pricing? Or was it more widespread across the whole bunch of different companies with new supply? And also just to confirm, did you see any acceleration in situations where pricing became more aggressive from existing competition? Or was the more aggressive pricing primarily from new supply in the various markets as they try to build occupancy? And finally, would you consider the new pricing to be irrational? Just -- not to stir the pot too much, but has it gone to irrational levels or how would you characterize it?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [86]

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Well, I think, first of all, there -- I won't point to any bad actors, say, for example, there's not 1 or 2 that are driving the market. I think again, when there's cumulative significant amount of new openings -- of course you have the new building opening, which it's quite rational to be aggressive on price to fill up the building, which is a relatively small investment relative to the cost of building and in opening the community. So that's not irrational. That certainly drives price competition. And that's not a new insight. We've seen widening releasing spreads, we've kind of talked in the mid- to high-single-digit range, lower or declines, and that has accelerated. So I'd say, just taking what we've seen and amping it up. And again, not because of any one factor, I think, but the cumulative impact of what's happened over the last years.

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Operator [87]

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And our next question comes from Nick Joseph of Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [88]

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It's Michael Bilerman, again, here with Nick. I was wondering just, Debbie, you mentioned as you talked about 2020 steady state and the deferral of the growth from an enterprise, from an FFO perspective next year largely was driven by the SHOP change, which we spent a lot of time talking about on the call. One of the things you talked about at Investor Day was having $2 billion of net investment volumes. And I just wanted to understand when you're walking back the growth for next year, does that still assume $2 billion of net investment volumes?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [89]

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Yes. Again, in terms of looking at 2020 and giving guidance or expectations and the components thereof, I feel very responsible to all of you to do so when that is ready and reliable. I couldn't feel more strongly about that, Michael, as you can imagine.

In terms of the deferral of enterprise growth, I would say that when I said steady state, it's simply what we have now, if you want to think about that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [90]

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Well, I'm just trying to piece together and maybe the bigger question is, this is an unfortunate situation that you've had to walk back. And SHOP is much weaker than you expect and, unfortunately, you have to manage other managers. So it's not even something internal that you can just fire someone or discipline someone for a bad performance or oversight. But if I look at sort of the guidance and the FFO trajectory, you had an issue last year where numbers had to come down pretty significantly for 2019. You had an Investor Day where, I would say, you did the reverse, which was get people really excited about the future growth profile of the company. You started talking down numbers a little bit on the 2Q call, went further at a conference in September saying things were a little bit weaker and then dropped today weaker results and a significant change for 2020. And so I can respect the level of wanting to be responsible and get all the numbers in action. But this is not a onetime event. And so I really would like to understand, from an enterprise perspective, what else are you doing? You talked about fixing things and maybe doing more dispositions or capital. But more so from your own guidance and financial perspective, what has the last 12 months taught you from that side?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [91]

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Yes. It's amazing to be at this stage in [grade] and still be learning good lessons. I would say that again, we've always been known over long periods of time to be reliable and to be forthright. And those are values we hold dear. I would say that one of the lessons is certainly that in a dynamic market like we have now, we have to be disciplined even if people are asking for information earlier or more detailed information, we have to be more disciplined to make sure we have all the inputs that we believe are necessary to have confidence in what we are telling you. And that lesson is reinforced by today. And we have -- we feel and have a deep responsibility to you and to our shareholders and to all of our stakeholders. And we -- that's how I would characterize really what we will do differently going forward and what we've learned.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [92]

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And then I think the key point that we're all trying to sort of isolate is, you've had the confidence to be able to tell the market today, we're not going to grow FFO in 2020 based on our trajectory of SHOP that we experienced in the second half and likely some element of what we expect for SHOP next year and we're going to please hold off until January, where we'll give you all the details. I think some of the other pieces in coming to that comment like $2 billion of investment, that's where I think we're trying to put the pieces to the puzzle together to at least understand you coming and making a declaration of no growth for next year. What does that mean? Does that mean you should assume 0 acquisitions, which is by the way, historically, the way you used to do guidance versus Investor Day where you layered that into your growth profile? And so I think there's some like apples and oranges, and I think we're all just trying to understand the meaning of your no growth and what's embedded, generally speaking, in that. What's in and what's not.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [93]

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Right. And what we can say is that, that growth will be deferred. We -- there's a significant amount, obviously, that is driven by our senior housing and with respect to the rest of it, we do want to come back to you at the right time and give you some of the more underpinnings of a range and what the components are that go into that range.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [94]

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And then just specifically -- right. I just want to make sure that when you said steady state, so in your comment about growth for next year would exclude net investment activity? Your comment about not getting to growth. Does that include -- because obviously, that could be accretive to numbers. And I just want to forget about all the other components, that is a major one because it could add anywhere from $0.05 to $0.10 to earnings if you're buying $2 billion of assets financed accretively. So that to me seems like a major one, just to make sure we understand.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [95]

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I mean we're -- as I said and you've interpreted correctly, Michael, in terms of steady state, we're just thinking about effectively organic without additional acquisitions, dispositions, capital markets, et cetera.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [96]

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So all that could potentially be additive to whatever outlook, but on a steady-state basis, current portfolio of current same-store, that would lead to earnings FFO being down next year. From that point, you're going to work your *** off to improve operations at SHOP and work with your managers, find accretive investments, and so there could be a chance, I hope that things could turn up better than that expectation. Is that a fair assumption?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [97]

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Well, we are certainly focused, first and foremost, on delivering the 2019 we've outlined here, and we will absolutely -- the whole team is committed to working as hard as possible to improve performance and to get the benefits of senior housing upside, external acquisitions, and so on. You have our commitment for that.

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Operator [98]

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And our next question comes from Derek Johnston of Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [99]

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So we've covered a lot and I apologize if I missed this, but what are some options to optimize the SHOP portfolio? So as you look forward, how do you balance the possible disposition of underperforming assets versus reducing dependence on senior housing through growth in R&I and/or maybe hospital investments, if you could speak to that for a second?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [100]

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Right. I mean there's a definite balance here because the leading indicators in senior housing continue to be very positive. There is a powerful upside in senior housing. We certainly can always optimize the portfolio and do things to improve performance. We also want to be there and have our shareholders be there to enjoy that powerful upside as it materializes. So there definitely is a balance there as you've pointed out.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [101]

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Okay. But as far as growth in R&I, we expect that [should to --] continue, but how about hospital investments in general? Is that a possibility as well?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [102]

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Yes. Again, I mean Bob talked about Ardent's performance, which has been good. That investment has done very, very well. And our new Montreal investment, of course, has 5 assets underway that we'll continue to invest in. So there are many good aspects of the portfolio and the enterprise that are going very well. And we can, obviously, continue to build on those strengths, while we also address where we are in senior housing.

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Operator [103]

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And our next question comes from Lukas Hartwich of Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [104]

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On SHOP, do you have any idea as why there's such a large disconnect with the NIC data performance?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [105]

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Well, on the one side on rate, I would tell you that the rate from NIC is not effective rate, it's not REVPOR. We really disregard it. It's the rack rate basically. So I think that, that really should be kind of off the table. In terms of occupancies sequentially, we built occupancy 40 basis points, they built at 20. The difference is the year-over-year comparison.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [106]

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And I'd only add that the coverage of NIC is not 100% of the country, too -- it's certain geographies. So as a representative, I think not complete.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [107]

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Great. And then just one other, can you compare and contrast the CapEx spend that is going into your SHOP and triple-net senior housing portfolios?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [108]

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Well, we know that Brookdale, for example, in the triple-net portfolio is investing a significant amount in CapEx and through our agreement with them, we've committed to keep the assets competitive in their markets by doing some yielding investments in capital as well. Most of the triple-net leases have requirements for CapEx spend. I would say, in general, our SHOP portfolio, which is higher end and higher rate by and large, we do tend to spend, call it, $2,500 a unit. So very significant to keep the assets in good condition and with a high price point for the resident.

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Operator [109]

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And our next question comes from Chad Vanacore of Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [110]

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I'm going to try to get a little more detail about the SHOP occupancy only because there seems to be a dramatic shift in occupancy from mid-quarter to the end of the quarter that just -- again, no new supply, doesn't really seem to account for. So can you give us a little more detail -- was that confined to specific properties and operators or geographies? Or is it something wider?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [111]

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Yes. So it is a significant change and it was significant even within the quarter and most notably in September. And that was a trend, which is true across all the operators that we have in our SHOP portfolio. And at least in my experience, pretty unprecedented. So it's not specific to a geography either. We saw again, I mentioned secondary and tertiary markets where more supply has come online earlier is where we see the most acute impact. But even in primary markets, you see similar trends. So that's why I keep coming back, Chad, to this notion of the cumulative effect. Is it a capitulation of some kind or not, only time will tell, but it is notable in that -- in its consistency as we look at it in different ways.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [112]

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All right. Then if this is wider spread, how has Ventas' expectation of a weaker SHOP in 2020, how does it alter your view of potential senior housing acquisitions in 2020?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [113]

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Well, again, as we talked about as it relates to 2020, we're not factoring in any of that in the conversation that we've had today. Over the past several years, we've been quite judicious about our senior housing investments. The vast, vast, vast majority of our investment activity has been in growing R&I pipeline and, obviously, non-U. S. Montreal base, for example, the LGM investment. And so I would say, our expectation about investments is really based on a case-by-case basis. We remain positive on the fundamental long-term growth in the senior housing business, but we've been very judicious about our investments in the senior housing business over the past couple of years.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [114]

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All right. So what do you think optimal portfolio mix looks like down the line 2, 3 years?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [115]

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Well, we've talked about this before, and I would say that we hope to continue building our university-based Research & Innovation business, where we expect to have excellent risk-adjusted returns. We've always thought that SHOP should be in the U.S. certainly somewhere between 20% and 35% and that's been consistent over time. And I would continue to endorse diversification in all its manifestations, which again, has -- the company is really benefiting from right now as you've seen the outperformance from Office, some of the health care triple-net lease business and so on.

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Operator [116]

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And our next question comes from Michael Mueller of JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [117]

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This isn't a 2020 question. But given the wide performance variance between the primary markets and the secondary markets, should we assume that you're going to shrink the secondary markets over time and ramp-up asset sales?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [118]

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I think as Bob said, if this is an outgrowth of earlier development in secondary markets, that's now being felt, we want to make sure that we're taking operational action, pricing decisions, and so on to compete effectively in the market, while also preserving that powerful upside. And so those may be the first to change on a positive note. And we will look at all of those markets and all those assets on a case-by-case basis, both operationally and strategically. So I don't think your conclusion is really directionally how we're thinking about it.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [119]

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Okay. Got it. And then the negative rent spreads, can you put some numbers around that just in terms of how they've trended?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [120]

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That's a Bob question.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [121]

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Yes. Last year, I would call it in the 7% range, this year closer to 10%, down.

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Operator [122]

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And our next question comes from Daniel Bernstein of Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [123]

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I guess I have a question on the early supply and some of the rate pressures out there. Is it stemming from the merchant builders rather than the owner operators? If you build an -- asset came online in '16 and you're 3 years in, and you're not stabilized, you're coming up against some of your -- probably your constructions and debt covenants. Is that where the pressure is emanating within the industry from kind of the merchant builder? Or is it -- again, I'm trying to understand how broad-based this -- the rate pressure is out there.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [124]

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Yes. I think it's all of the above, to be honest with you. It's not, again, specific to any one -- at least as we see it -- any one operator or owner, it's more of an industry commentary than anything and a geography-specific conversation.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [125]

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Okay. And then I assume it's more on the AL side than the IL side? Or again, it's just kind of...

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [126]

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That is an important distinction. Yes. Absolutely, it's definitely AL. Again, that's where, as you know, the supply has come.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [127]

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And where the starts have gotten the lowest, which is...

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [128]

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Right. And the most notable improvement 9 years low I think, in the latest data -- the lowest in 9 years. And so IL is performing pretty well. Actually, it's the AL that's seeing the pressure.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [129]

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And so does that -- nothing -- we're not going to get into 2020 acquisitions or guidance or anything like that, but from just a broad perspective, does that then leave you more inclined to say continue to buy and build assisted living given where the starts are? And again, you kind of continue down the path of more RIDEA exposure versus triple-net? Or has something changed in maybe where you would want to invest and how you would want to invest in senior housing?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [130]

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As we've talked about in terms of our investment strategy, we are positive on the long-term fundamental outlook for senior housing. We have invested judiciously over the past few years. We're building our Research & Innovation business with universities, which is our #1 priority. And we'll continue to look at investments on a case-by-case basis as we see good -- what we believe is good risk-adjusted return.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [131]

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Okay. We'll -- I guess we'll continue some of the conversation offline as it is getting late.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [132]

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I look forward to it.

So I want to thank everyone for their patience and participation in this call. As Michael eloquently said, we are aligned and are committed to working as hard as we can on behalf of our shareholders as we always have. And we really appreciate your continued support and trust. So we look forward to seeing you in November. Thank you.

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Operator [133]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.