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Edited Transcript of VTR earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Ventas Inc Earnings Call

Chicago Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Ventas Inc earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian N. Cummings

Ventas, Inc. - SVP of Asset Management - Seniors Housing

* Debra A. Cafaro

Ventas, Inc. - Chairman & CEO

* 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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* 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

* 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 Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Tao Qiu

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Ventas Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Juan Sanabria, Head of IR. You may begin.

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

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Thanks, Tiffany. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended June 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 from the company's expectations, whether expressed or implied.

Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Additional information about the factors that may affect the company's operations and results is included in the company's annual report on Form 10-K for the year ended December 31, 2018, and the company's other SEC filings. Please note that any 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, 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 Ventas Second Quarter 2019 Earnings Call. I'm happy to be joined on today's call by my talented Ventas colleagues, as we discuss our enterprise momentum, our productive second quarter, our increase to full year 2019 expectation and our recent addition to our outstanding Board of Directors. I'd also like to reinforce our commitment to growth in 2020, and emphasize how well positioned we are to deliver superior total return in the coming years.

First of all, a sincere thanks to all of you who attended our Investor Day in June. The whole 24 hours we spent together at our R&I Knowledge Community in uCity, Philadelphia, were jam packed with new information, insights and incredible connections. I'm so glad we can spend time with you showcasing our deep and broad team, our best-in-class partners and the power of our diverse high-quality portfolio.

Turning briefly to our second quarter results. I'm very pleased to report another solid quarter of normalized FFO, $0.97 per share, resulting from property growth and excellence in our office business. Building on our strong momentum, we are also delighted to increase our full year guidance to $3.80 to $3.86 per share, an increase of $0.03 at the midpoint from our prior range.

Now I would like to address the current activity and future opportunities at Ventas. During my 2 decades, we followed a consistent, successful strategy that endures. We strive to combine a high-quality, diverse portfolio, benefiting from strong demographic demand, with industry-leading, growing partners in all our verticals and let our collaborative and experienced team get after it. Our goal is to produce consistent growing cash flows and superior returns on a strong balance sheet for you. The enduring Ventas Advantage has enabled us to outperform and deliver 23% compound annual return for 20 years through multiple cycles.

Now following a period where we have substantially elevated our portfolio and partner mix, we are ready to pivot to growth in 2020. We have identified 4 building blocks that underpin our confidence in Ventas' future growth and success. These are: core portfolio performance, the powerful upside in senior housing, meaningful accretive external investments and contribution from our exciting research and innovation business, as we build, open and lease-up our near-term development pipeline. Bob will address the first 2 building blocks in his commentary, and I'd like to focus my remarks on our accretive external investments in our R&I pipeline, which combined for nearly $3.5 billion of announced investments year-to-date.

Of that total, $2.5 billion represents investments above and beyond our university-based research and innovation announced development project. Year-to-date activities follows our outstanding, successful investment framework, which blends investments and trophy assets, accretive quality assets and well-structured high-yielding assets to produce growing cash flows and increasing value.

Let me unpack these attractive investments we captured. First, we've acquired over $200 million in trophy assets in our office business. In addition to our recent investment in Cambridge, we recently acquired a newly constructed Duke Health asset, which expands our investment in academic medicine. It also broadens our existing relationship with Duke University and Duke School of Medicine, which is an anchored tenant in our nearby Chesterfield R&I building, where Duke researchers engage in translational science to discover treatments for common health disorders. This increasing convergence of research in academic medicine, which is also evident in the 10 uCity market we toured on Investor Day, shows why Ventas is incredibly well positioned to lead in the medical office, academic medicine, R&I and university space. Second, we announced our exciting and accretive investment in 31 Class A apartment-like senior living communities in the desirable Québec market, with Le Groupe Maurice, at an attractive valuation of $1.8 billion. These 31 large-scale communities provide an active life style for seniors, with high-end amenities and a la carte services. As a result, they lease-up quickly to a younger demographic. The 31 communities are expected to deliver 4% compound annual NOI growth over the next 5 years.

We project incremental NOI growth from 5 in-progress LGM developments, which adds $300 million of investment activity to our announced amount. We also have an exclusive partnership with LGM to jointly develop and own additional communities over time to meet the robust needs of the rapidly growing senior population that lives in senior housing in large percentages in Québec. We have already closed the first days of our LGM partnership and look forward to completing the remaining aspects of our investment in the third quarter. Last, we were delighted to close the $490 million investment in the secure $1.5 billion Colony Capital refinancing in Q2. This high-yielding 9% investment is well structured and supported by a large diverse pool of 156 medical office buildings, senior housing and health care assets.

The second building block of our forward growth plan I want to share is our $1.5 billion near-term development pipeline in our university-based R&I business. So far, this year, we've announced 5 specific projects totaling nearly $900 million. The projects are with top-tier universities, who are leaders in scientific research and academic medicine and should be delivered in the 2021 to 2022 time frame. These developments established will expand powerful Knowledge Communities for our existing relationship with Penn, Drexel and Wash U. They also create the nucleus of new Knowledge Communities, with additive relationships with the University of Pittsburgh and Arizona State University, each of which is in the highest ranks of research funding in the U.S. We are excited about all of the new projects, but since you all know, I'm a proud Pittsburgh native. I'd like to highlight the Pitt project today. The Pitt Immune Transplant & Therapy Center will create a research academic medicine and innovation hub anchored by the University of Pittsburgh to house groundbreaking immunotherapy research in collaboration with nationally recognized health care leader, UPMC. The Pitt Transplant & Therapy Center development is already well underway.

As we look forward to the future in our research and innovation business, we see incredible opportunities we're well positioned to capture. In our immediate sights are the remaining projects, approximating $600 million in our current pipeline that we expect to commence within 12 months. Beyond our near-term pipeline, we control adjacent lands that supports over $3.5 billion or 6.2 million square feet of incremental development opportunity. And finally, our university partners own additional on-campus land that we can build on or acquire to facilitate further expansion as exemplified by our Drexel School of Nursing and health professions built-to-suit projects.

In addition to growing and improving our portfolio of diverse research, senior housing and health care properties, we remain equally, if not more focused on aligning with best-in-class partners. Uniquely in our business, our partners are key ingredients to our success. We are proud that we have existing development partnerships with best-in-class Wexford Science & Technology, who is so well regarded by top universities nationally for designing, developing and delivering powerful Knowledge Communities that meet their needs. And we value our long-standing partnership with Atria Senior Living, who demonstrated once again at our Investor Day, it's differentiating skill and scale that made Atria a winner in senior housing as well as our strong partnership with PNB, a leading medical office partner, who develops and manages our trophy center asset in downtown San Francisco.

Finally, you experienced firsthand the power of our ongoing collaboration with universities like Drexel and Penn; innovators, like the science center; and gene therapy companies, like Amicus and Spark, when we were together in Philadelphia's uCity market. Now we're excited to join forces with Le Groupe Maurice, a well-regarded brand, developer and leader in the Canadian senior housing market. Both Ventas and LGM began their stories in 1998 and have enjoyed parallel success in building sustainable, respected firms. I recently had the opportunity to visit with Luke and his leaders at their offices in Montréal, and I continue to be extremely impressed by their track record, ethics, reputation, engagement, capabilities and plans for the future. When we close our partnership in full, I can't wait to tell them so, hopefully, in French. It is really a privilege to collaborate with these industry leaders whom we are proud to call our partners. We will continue to invest in our mutually reinforcing success.

Lastly, let's talk about our great Ventas people, who are a competitive advantage for us. At Investor Day, you saw firsthand the breadth, depth and collegiality of our team. I'm continually amazed by their integrity, intelligence and work ethic, and that's all the way through the organization. They are truly committed to Ventas and to each other. Luckily, I'm not the only one who recognizes the outstanding capabilities of the Ventas team. Bob Probst, our CFO, was recently named Public Company's CFO of the year. Those of you in the REIT space can certainly see that Bob is one of the best CFOs in our business. It's fantastic that his excellence was recognized across all industries by Financial Executives International. Go, Bob!

Another vital aspect of our Ventas people is our diverse and independent Board of Directors, which has also been a key differentiator for us. The Board's individual and collective judgment, experience and engagement has been crucial to our long-term success. Today, we are excited to announce the appointment of Sean Nolan as the tenth member of our board. Sean is a repeatedly successful life science and pharma executive. His unique and complementary insights and experiences will add to our depth and enhance our decision-making and opportunities set in our fast-growing research and innovation business and our overall enterprise growth.

This is a terrific time to be at Ventas and to invest in Ventas. Our business model, which is broad and diverse, gives us the continual opportunity to find investments that add value and drive the company forward. These opportunities are right in front of us. Our businesses are supported by powerful demographic demand. Our valuation has upside. We have a strong financial condition and attractive dividend. We have identified the building blocks that will support our future growth, and we know how to execute on our plans.

In closing, with 2 decades of perspective and outperformance through cycles, the Ventas Advantage of our high-quality portfolio, our best-in-class partners and our excellent team gives us potent confidence in our ability to deliver outstanding performance in the coming years. We remain committed to and focused on pivoting to growth in 2020.

With that, I'm happy to turn the call over to our CFO of every year, Bob Probst.

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

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Thanks, Debbie. I'm happy to report solid second quarter results, driven by growth from our high-quality diversified portfolio of senior housing, office and health care real estate. The year is playing out much as we expected across our property portfolio, and as a result, we are reaffirming our full year 2019 property level guidance.

Looking at the second quarter, our total property portfolio delivered same-store cash NOI growth of 0.3% in the second quarter, with office and triple-net leading the way and all of our segments performing in line with our expectations. Let's take a deeper look, starting with our SHOP business. SHOP same-store cash NOI in the second quarter was 2.9% lower versus prior year, within the range of our full year NOI expectations of flat to down 3%. Q2 same-store occupancy was solid at 86.4%, representing a 40 basis point occupancy GAAP versus prior year. As a reminder, the year-over-year occupancy GAAP averaged 80 basis points for the full year 2018. Meanwhile, Q2 REVPOR grew 60 basis points year-over-year. Re-leasing spreads were impacted by price competition and trended consistent with last quarter. We believe that REVPOR in the second half of the year should benefit from lapping price discounting that accelerated in the second half of last year.

Operating expenses grew a modest 1.9% in the second quarter. Our leading operators continued to expertly manage staffing and drive efficiencies. That said, we maintained our view that full year OpEx will increase in the 2% to 3% range, given a tight labor market. At a market level in the U.S., we continue to see NOI growth in submarkets, such as South Orange County, Los Angeles, and Eastern Long Island in New York, mitigated by declines in market such as Chicago and secondary markets. That said, even in challenged MSAs, we see pockets of occupancy and NOI growth at the submarket level, for example, in Northeast Atlanta.

Canada once again was a strong performer in Q2, with occupancy of 93.5%, NOI growth of 3.6% in the quarter and 6% in the first half. This performance underscores the health of the Canadian senior housing market and the quality of our portfolio north of the border, key impetus behind our strategy to further enhance our position via the exciting LGM portfolio in Québec. We maintain our full year 2019 same-store SHOP NOI guidance of flat to minus 3%, though expect to trend toward the lower end of our range. Big picture, although we are still in the midst of elevated new openings, we believe strongly in the powerful upside in senior housing and its contribution to our 5-year growth. As portrayed in Philly, we expect occupancy to inflect positively in the second half of 2020. Through our proprietary data analytics, we can look ahead and see that demand is increasing and that supply is easing as evidenced by our forecast that new openings across our 194 submarkets should improve by about 15% in 2020 versus 2019, in fact, reaching the best level of new deliveries since 2015.

Looking further ahead, improving new construction starts, accelerating demand and significant operating leverage underscore our conviction that over the next 5 years, our SHOP business can grow same-store cash NOI at a 4% to 6% CAGR.

On to triple-net, where same-store cash NOI increased by 1.5% for the second quarter, driven by annual rent escalators. Excluding the impact of a prior year cash fee of $2.5 million, arising from the 2018 Brookdale lease extension, the company's triple-net portfolio grew 2.9%. Trailing 12-month EBITDA and cash flow coverage for overall stabilized triple-net leased portfolio for the first quarter of 2019, with latest available information, was stable at 1.5x. As we foreshadowed on our last call, given current industry conditions, trailing 12-month coverage in our triple-net same-store seniors housing portfolio moderated to 1.1x. Coverage in our postacute portfolio was steady at 1.4x, and finally, Ardent continues to deliver its results, driving a 10 basis point coverage expansion to a very strong 3.1x.

We continue to estimate a $10 million impact to Ventas' 2019 NOI through transactions addressing certain smaller low-coverage senior housing triple-net tenants, with approximately $3 million crystallized year-to-date. Potential transactions include operator and/or business model transitions. An example effectuated in the second quarter was the transition of 10 assets on the East Coast from a smaller triple-net tenant, ESL, under our management contract. We see upside in the cash flows at these assets over time. We continue to estimate that our triple-net portfolio will grow 2019 same-store cash NOI in the range of 0.5% to 1.5%.

Moving on to our highly valuable office segment, which includes our university-based research and innovation and medical office businesses, it represents 28% of our NOI. Our office segment delivered strong same-store cash NOI growth of 2.9% in the second quarter. Our R&I business led the way, increasing Q2 same-store cash NOI by a robust 4.6%, driven by occupancy gains of 120 basis points on strong lease-up at our Duke and Wake Forest assets together with revenue per occupied square foot increasing 3%. As an example, in Q2 of the strong demand for on-campus research space, Penn Medicine took possession of 38,000 square feet of lab space at 3711 Market Street in Philly, replacing the science center, which expanded to 50,000 square feet in the newly completed 3675 Market Street building. Both buildings are now over 97% leased. We affirm our full year guidance of 3% to 4% for R&I same-store NOI trending towards the high end of the range after a strong first half of the year.

Turning to our medical office business, MOB same-store NOI increased by a solid 2.4% in the second quarter. As Pete Bulgarelli highlighted in Philly, the MOB team is focused on driving NOI by executing on operational best-practice initiatives. Some green shoots of these efforts include very strong tenant retention in Q2 of 92% and sequential occupancy growth to nearly 91%. Operating expenses decreased to 1.4% year-over-year, reaping the benefits from utility savings arising from sustainability investments as well as lower repair and maintenance costs. We are enthusiastic about our MOB business and reaffirm our full year guidance of 1% to 2% for 2019 MOB same-store NOI. On a combined basis, we reaffirm our office portfolio 2019 same-store cash NOI guidance range of 1.5% to 2.5%, with the expectation to trend to the higher end of the range.

Pulling back for a minute, you'll recall that core growth, defined as our triple-net MOB and organic R&I performance, is a fundamental building block of our 5-year growth expectation. We are steadfast that core will be an important growth contributor. Our diversified triple-net portfolio will benefit from escalator-driven growth, while [we and] the office team are building momentum in MOB and going from strength-to-strength in the R&I operating portfolio.

Turning back to the year now. Our overall company's second quarter financial results and our increased 2019 guidance. Normalized FFO per share in the second quarter was $0.97. The FFO performance versus 2018 was primarily the result of property growth as well as $0.02 from the recognition of cash profit on Paragon warrants. Our tenants in our UMB Knowledge Community and another proof point of the attractiveness of our R&I tenants.

Q2 results were also affected by the earnings drag from the LGM equity offering in early June. I would also note that year-over-year, we're lapping the second quarter 2018 payoff of the Ardent loans and related fees. We were active in the Capital Markets in the second quarter. We raised nearly $800 million of equity in early June to fund our LGM investment and followed on in July with roughly $80 million raised on our ATM to partially fund our net Colony investment. We also tapped the debt Capital Markets, issuing $450 million of attractively priced 5-year bonds at 2.65% with proceeds used to retire bonds maturing in 2020, thereby, extending the duration of our debt portfolio to approximately 7 years. As a result of these actions, our net debt to adjusted EBITDA ratio improved 30 basis points sequentially to a robust 5.2x at quarter-end, principally as a result of the timing of equity raised in early June, the advance of the July closing of the first phase of the LGM transaction.

Let's close with guidance. We're happy to raise our normalized FFO per share outlook for the full year 2019 to now range from $3.80 to $3.86, a $0.03 improvement at the midpoint from previous guidance of $3.75 to $3.85 per share. As just discussed, we're also reaffirming our property portfolio and segment level same-store cash NOI growth for 2019. Assumptions underpinning our FFO guidance are largely the same as last quarter with a few notable updates. First, guidance now includes the impact of announced investments, including Le Groupe Maurice and the Colony loan investment, and associated Capital Markets activities. The second and final phase of the LGM transaction is expected to close in the third quarter. Second, we now expect to generate $600 million through 2019 dispositions and receipt of loan repayments, up $100 million from prior guidance from expected sales of noncore senior housing operating assets at attractive pricing. Approximately $360 million of disposition proceeds have been realized year-to-date. Final addings to noted guidance include increased premium costs for property and casualty insurance as a result of our August renewal in a tight insurance market. Our 2019 outlook also assumes $370 million weighted fully average, fully diluted shares. No new capital market activity is included with the exception of Canadian debt funding connected with the completion of the second phase of the LGM transaction.

To close, the Ventas team is very pleased with their start to the year and is committed to execute with excellence against our initiatives in 2019 and to pivot to FFO growth in 2020. We're confident we have the portfolio, partners, team and perspectives necessary to deliver.

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) And our first question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Bob, on the same-store SHOP NOI guidance, you mentioned in your remarks, that you expected trend towards the lower end of the range. What are you now expecting for full year 2019 in terms of the number?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [3]

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So Nick, yes, so we're correct -- you are correct. We are guiding towards the lower end. A reminder, the range is flat to down 3%. We are down, call it, 2.5% in the first half. So I would describe the full year at the lower end as below the midpoint, but still within the range of that original guidance.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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So it's around 2.5% for the full year as well?

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

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Between 1.5% and 3% down, yes.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

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And then when you think about your comments for 2020 SHOP performance for the next 5 years, what gives you the confidence to achieve kind of those goals that you've laid out, given the challenges you had already this year in terms of results versus what guidance was initially observed?

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

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Yes. Great. Thanks for asking because I think it's really important to differentiate between the here now and the guidance and the results just reported, which clearly are still in the midst of the timing mismatch between supply and demand. There's no question, and very much in line with expectation, again, reaffirming our full year guidance. That is different than a 5-year outlook. And we did, in the prepared remarks, talk about the demand/supply equation going forward, specifically in '20, where we see an improvement in new deliveries of 15% year-on-year, '20 versus '19, and indeed, the lowest level you've seen since '15, which is obviously informed by proprietary data. And really no change, frankly, in the last month from what we told you then and what we see now. So our optimism remains. Clearly, the powerful upside of operating leverage, accelerating demand and visibility into supply is what gives us the confidence in that 4% to 6% CAGR over that 5-year period. So we remain steadfast on that point.

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Operator [8]

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And our next question comes from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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So I know you added -- you announced a lot of new R&I developments at the Investor Day, but I think you also talked about, over the next 12 months, you would -- you could be announcing another $600 million plus of projects, and I know it's only a month ago, but do you have any updated thoughts on that?

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

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We would confirm that, that we have announced the $900 million in 5 specific projects, which are outlined for you. And then there are about $600 million more in the near-term pipeline that compose the $1.5 billion pipeline that we are working on and believe will be commenced in the next 12 months.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Okay. And then just 2 more questions on SHOP. If we look at the FAD adjustments you gave on the CapEx in the SHOP segment, it was up, and I think -- year-over-year. And I think you also raised your CapEx guidance higher. Can you just explain what's driving that? I mean, how much of that is just routine costs going up versus you are spending more money to position the portfolio better relative to some of the new supply competition?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [12]

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Sure, Nick. Yes, thanks. So well spotted. So we did increase on a full year basis our FAD CapEx by about $5 million at the midpoint. That is Le Groupe Maurice now incorporated into the forecast. Of course, that's a SHOP asset. When you look in the second quarter, particularly at SHOP on FAD CapEx spend year-on-year, it is higher year-on-year. I would point to timing, very much on that. So our full year outlook hasn't changed in regards to the core of the base FAD CapEx. It's really just timing within the year.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. That's helpful. And then just last question is on the, I think, the number of assets changed in the same-store for SHOP. And I know you had some -- I'm just trying to kind of reconcile the overall SHOP portfolio. I know you transitioned you said some triple-net to ESL. And then it looks like you also -- you lowered the number of assets in the same-store for SHOP. And then I think you also have some higher amount of assets that are now intended for disposition versus last quarter. So if you could just kind of reconcile that, that would be helpful?

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

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You bet. There's a lot going on as you readily say. In fact, the topic sentence I would make is that, the vast majority of our assets are in the same-store pool, and it's a helpful table that reconciles what's in and what's out, but over 90% is in the pool. Now within that, there are certainly some changes. So for example, in the guidance for disposition, I highlighted an incremental $100 million, particularly as a result of SHOP noncore dispose and that's incremental and new to the guidance. That's approximately 10 assets. Those have been taken out of the same-store pool and are in advanced stages of negotiation. So that's an important change. And as also noted, transitions within triple-net between business model, particularly from triple-net to SHOP also occurred and notably with ESL. So those are all in the midst of that reconciliation and new quarter-over-quarter.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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Okay. And is there any benefit to the full year SHOP same-store performance by selling those assets?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [16]

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Not material.

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Operator [17]

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Our next question comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [18]

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So just 2 quick ones. Just going back to SHOP. So you've narrowed the range towards the bottom. If I look out, I know the 5-year is different from today, but you do have a pretty good handle on supply as you highlighted for the next 3 years. I'm just hoping you can give us some sort of trajectory, whether it's, "Hey, this is the next 3 years, then we're assuming x in year 4 and 5." Given you have all the granular data on supply and demand, can you just give us some incremental color on kind of how you see this 5-year progressing in terms of trajectory?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [19]

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Vikram, hi. This is Debbie. I'm so glad that this is a topic of interest and you were able to really appreciate all the data analytics and the detail that we provided for you at Investor Day. So Bob will answer your questions, but...

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [20]

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Yes. So there was a bit of incremental news today, in that we shared the 15% improvement in supply delivery next year as our expectation. We showed at the Investor Day 35% over a 2-year horizon. So as you go into '21, even more improvement on deliveries. And of course, at the same time, you see the increasing demand, both on the underlying population and penetration. And so that together begins to accelerate in '21, '22, '23 and beyond. And so the slope of the curve will follow that in terms of our NOI. And I emphasize again, next year, we'll talk about occupancy inflection in the back half of the year. Of course, we continually have to work through the deliveries, but it's really an occupancy commentary. But again, I keep coming back to the 5-year confidence, and we really remain very confident of that and have the insights to give us that confidence.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [21]

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Okay. But would it be fair to say that since you have a pretty good view on the next 3 years, year 4 and 5, you're just sort of assuming continuation of demand and maybe somewhat of a [deceleration] in year 4 and 5 from year 1 and 3?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [22]

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Yes, indeed. This will hopefully accelerate in the latter years of that 5-year, no question.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [23]

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Okay. And then just on the Duke MOB deal -- I just want to clarify, is it an MOB? Is it sort of a mix between R&I and MOB? You did pay a sub-5 cap rate? And I believe, just by talking to brokers, there was a decent amount of interest in this asset. So can you give us some more color? Was there a bigger, broader rationale? Are there other growth opportunities within the asset or just broadly with the system?

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

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Yes. Thank you. So it's a 5.5% cap. It's a new asset, long-term lease with Duke Health and affiliated physician group. I think importantly, it is showing this convergence of academic medicine and research and innovation. We have a nearby research and innovation building that really was built for Duke researchers and Duke Health faculty, where they are conducting translational science that is used to cure and treat illness. And so I really like the acquisition for many reasons, certainly, on its own as a good risk-adjusted return, but importantly, because it both expands our relationship with Duke, and it really shows this convergence that we saw at Penn and that we're seeing here between medicine and research and innovation business.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [25]

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Just to clarify, that's 5.5% GAAP, right? Not cash?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [26]

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It is, because it has -- it's 100% leased, and it has a 13-year lease with 2.2% annual cash escalators. So that's why we think it's a good risk-adjusted returning investment for us.

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Operator [27]

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And our next question comes from Michael Carroll with RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Bob, I wanted to see if we could talk a little bit about supply again. And I know in the NIC data that came out a few weeks ago kind of showed that deliveries were fairly consistent in the first half of this year, but it's supposed to spike in the second half before moderating again in 2020. With your work that you guys have been doing on your portfolio, do you see something similar to that? Or do you think that you're going to see a much smaller uptick in the second half of this year?

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Christian N. Cummings, Ventas, Inc. - SVP of Asset Management - Seniors Housing [29]

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This is Chris Cummings, Senior Vice President of Asset Management for Senior Housing, I'll take that one. So as we look at the supply forecast, we're really looking at a combination of data sources including NIC as well as others. And I think what we're seeing is a consistent pattern in the back half that's received in the front half in terms of deliveries.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Okay. And then I guess, Bob or Chris, if you're looking at the -- your supplement and the data that you provide about the construction and process pipeline within your portfolio, it does seem like it increased a little bit in the second quarter versus the first quarter. I'm assuming you're just grabbing the NIC data there. I mean, I guess, with the work that you guys have done, has that increased somewhere to what you're seeing? Or is that a little bit different?

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Christian N. Cummings, Ventas, Inc. - SVP of Asset Management - Seniors Housing [31]

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Yes, this is Chris, again. I'll take that one. So what you're seeing is really a factor of the pool change that we talked about. If you look at the same pool, first quarter to second quarter, you would have seen a similar decline, 30 to 40 basis points as you saw in the NIC reported data.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Yes. I was referring to the construction in process pipeline within your supplement. Your supply sheet showed that there is 6.5% of developments are in process right now versus the 1Q '19 supplement, which showed 5.9%. So within that data set that you provided, it assumed that supply or construction activity increased a little bit.

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Christian N. Cummings, Ventas, Inc. - SVP of Asset Management - Seniors Housing [33]

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Yes. And we're referring to the same, Mike. So the phenomena here is, as the pool changes and you take assets out of certain markets, the denominator changes, so the percentage changes. And that's -- it's really that. I would step back and say though the NIC data, as you know, gets revised, as we look at our data, it really hasn't changed in terms of the outlook on supply, as I mentioned, from where we were 30 days ago, very, very consistent. So nothing new to report on supply from our perspective.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [34]

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Okay. Perfect. And then I guess last question. Can you talk a little bit about the flu season? I know it was a little bit longer this year compared to the past several years? I mean, did that impact your results at all?

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Christian N. Cummings, Ventas, Inc. - SVP of Asset Management - Seniors Housing [35]

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Not in the second quarter. There was a little bit of a storm in a teacup, I'd say, because it started out pretty aggressively, and it was a fast tail, as we described it, but then it went away pretty quickly. So a nonevent in the quarter.

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Operator [36]

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

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [37]

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Can I ask a couple questions on guidance? So you maintained your same-store NOI guidance. Obviously, this was trending higher, SHOP trending lower. Why not change the components if you think that's going to be the case? Is that just a policy issue? And also, are those 2 items going to essentially offset each other? Or is the total same-store NOI trending above or below midpoint?

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

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Yes. Whether it's a policy. It might be a, I call it, a framework, a guardrail. In so far, just a quarter-to-quarter guidance I don't think should change on a segment level, barring something you need material. So qualitatively, giving you a sense for where we're headed and/or changing the range in light of material changes is our framework for sure from here. We think that's good for the investors as well. And as you say, some within segment, higher-end or lower-end, but again, on average and in total, sticking just to the range we gave in February.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [39]

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Okay. And then can I ask what you're expecting as far as SHOP occupancy for the second half of the year? And then separately, but within guidance still, what is your assumption on the base rate of the Colony loans, given LIBOR has been trending down?

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Christian N. Cummings, Ventas, Inc. - SVP of Asset Management - Seniors Housing [40]

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I'll do the first one. So guidance if you go down the P&L for what we said in February, we are still holding true. And on the occupancy line, that was flat to down 50 basis points year-over-year, and we are still holding to that number down to the P&L. So as I mentioned, whether it's costs, rate, occupancy, it's really shaping up through the P&L very much in line with the range we gave initially.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [41]

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And regarding Colony, we were just -- take it at about 9%.

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Operator [42]

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And our next question comes from Chad Vanacore with Stifel.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [43]

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This is Tao for Chad. My first question is regarding the $9 million warrant income from Paragon? Could you remind us of the particular transaction, and how it was structured?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [44]

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Yes. We basically had an investment in the equity of Paragon, which is one of our tenants in our UMB Knowledge Community, and that is a high-quality tenant who was recently acquired for $1 billion to $2 billion. And the valuation on the warrants was obviously at a lower level. And when the transaction closed, we were able to gain the difference between the strike price and the valuation. And so we were very happy to receive those cash proceeds, and it really does show the quality of our R&I business, once again.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [45]

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Would you say that's like equity for rent-type of arrangement? And do you have other similar equity investments in your R&I portfolio that potentially could add to earnings down the road?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [46]

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Thank you. Yes. I mean, it basically is just like an option. And we have maybe a handful of these little things kicking around in the office business, and it may or may not come to fruition over time, but it does really point out the good tenancy that we have and the opportunity that we have in the office business.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [47]

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Okay. That's helpful. So my second question is regarding the triple-net senior living assets. So it looks like you sold 6 assets in the second quarter. These are Brookdale assets?

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

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Yes, that is correct. They were Brookdale assets. We have approximately $100 million of Brookdale dispositions in our guidance, and that was about $25 million of the $100 million.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [49]

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Okay. So we still have maybe like 2/3 of those that is yet to be sold?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [50]

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There are a few more assets remaining in our agreement with them that are being marketed for sale.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [51]

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So it looks like the triple-net coverage dipped a little bit in the second quarter. Could you tell us what the Holiday coverage is like? And what is ESL prior to this transition?

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

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As we mentioned at Investor Day, Holiday is a 1.15x fixed charge coverage. And regarding the triple-net coverage, it's as we expected when we reported last quarter.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [53]

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And in your press release, you said that you're not looking to modify the Holiday lease. Would you like to attach the time frame for that? Is this the strategy to kind of wait for the upturn of the market?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [54]

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We're going to have to move on just so we are courteous to the other callers, but we're in a good spot there and have lots of options, a good portfolio and a good lease. So we're going to have to move on, but thank you for your questions.

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Operator [55]

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

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [56]

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Just a follow-up on some of the lease coverage. Do you expect lease coverage in the triple-net senior housing portfolio to tick back up once you complete asset sales?

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

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Dan, this is Debbie. I think that what we can say about the triple-net portfolio, remember, it's a lagging indicator. It's a trailing 12-month indicator, that it's reported 1 month in arrears. So as we go through this protracted housing cycle and then when we get in the powerful upside, you should see that coverage again trend down as it has been and then over time trend up again. But basically it will be behind the way you report your P&L and your SHOP assets, which is immediate. And so that will take -- I think that cycle is a long-dated cycle that will take years really to play out. And it will pick up again over time as the senior housing business benefits from demand, and we achieve this powerful upside, which affects both the SHOP operators as well as the triple-net operators.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [58]

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Okay. Are you looking at that -- does that -- your comments just now apply both to independent living and assisted living. If you look at some of the NIC data, maybe the data that you have on your particular portfolio is a little different, but independent living construction seems a little bit more elevated now than assisted living. And the triple-net portfolio, you can correct me if I'm wrong, is a little bit more tilted toward independent living than AL. So do the comments apply both to AL and IL? Or do you have some tilts in those comments towards assisted living?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [59]

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Yes. With our proprietary data analytics and our experience, you're sophisticated enough to see that. Within senior housing, those 2 subsegments may have also their own separate timing cycles, but I'm talking now about the whole. And we do look at those individually, but we're talking now about the whole of senior living. And I think the main point is that you may see operating improvement in assets before you see coverage start to cycle back up and that's our expectation.

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Operator [60]

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

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [61]

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So I just wanted to follow up on the -- I wanted to just follow up on the cash same-store NOI trending a little bit lower. Bob, I think -- so you're expecting some improvement. I think you were talking about sort of easy comps on a REVPOR basis. Can you just sort of help me understand what else is going on from sort of an occupancy and expense perspective sequentially, as we head into the second half of the year that gives you the confidence that will kind of -- that sort of deterioration that we saw sequentially, year-over-year deterioration will sort of moderate?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [62]

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Yes. So let me talk about sequential first. Sequentially, if you look at SHOP, senior housing, there's always a seasonal dollar sequential decline, first half, second half, and that's more days where PTO, overtime, high utilities. So seasonally, we expect first half and second half dollars to be lower as it is every year, nothing new to report there. Year-over-year is really where the discussion is, because that takes that out. And looking at the P&L, again, occupancy within that 0 to 50 basis points range, I mentioned REVPOR strengthening as a result of lapping prior year. At the same time, OpEx, 2 to 3 is still a good number for the year, basically implying that we're going to see some of that labor wage pressure coming through in the back half of the year. All of which nets out to the lower end of the range for the full year and a pretty consistent performance NOI in the first half. Hopefully, that answers your question.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [63]

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Okay. Yes. It's helpful. And then looking at the -- just the triple-net portfolio, overall, triple-net revenue declining sequentially. I assume the BKD sales may have been a portion -- I have to look at the timing there. And then there was some transitions you talked about in the quarter, I guess, the ESL. How much of the $10 million bucket of restructurings that you sort of laid out was used up in the quarter, if any? And then is it just those BKD sales and the transitions that were driving that decline in the triple-net revenue?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [64]

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Yes. So let me talk about the $10 million. For the year, $3 million crystalized year-to-date principally second quarter, and phasing of the balance of the $10 million, call it, $3.5 million each quarter, Q2, Q3. So that's how the $10 million plays out, and certainly, the transition to ESL is a part of that in the second quarter when that was consummated. In terms of dollars, sequentially, you're pointing to the right items is that if it's kind of total revenue. Those are definitely drivers.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [65]

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No other one-times to point to then?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [66]

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No.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [67]

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Okay. And then lastly, can I give you one quick one for you, Deb, on investment. I know you guys are convicted on the same-store growth and the 5-year outlook, which is obviously pretty impressive numbers, and would be I think the best in your portfolio over that period. So should we expect -- as you're sort of focusing on investment that you would ramp your investment in U.S. SHOP opportunities in the near term?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [68]

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Well, again, one of the benefits of our enterprise -- and we have invested about $3 billion a year since 2010 or 2009. One of the benefits of our enterprise is that it's broad, it's diverse. We have -- can play in different parts of the capital stack. And so we are constantly evaluating opportunities across our verticals and went up and down the capital stack to make good risk-adjusted returns. And so I think you will see that across the board as you have in the quarter with development in R&I, with the Le Groupe Maurice investment and with our interesting trophy office assets. So you will see us invest across the board. I mean, we have a great business to be able to do that.

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Operator [69]

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

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [70]

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Actually, all my questions were answered. I thought I queued out, my apologies, but thank you, and have a great day.

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Operator [71]

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And our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [72]

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Just a quick numbers question. Was the $0.02 of warrant income in prior FFO guidance? And is anything similar baked into the implied 2H guidance?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [73]

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No. This is Bob. No, that was not baked into the guidance. Obviously, now what is that $0.02? And we don't have anything new like the warrants in our guidance.

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Operator [74]

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And we have a follow-up 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 [75]

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Yes. Michael Bilerman. Just 2 questions. The first, Bob, if you can just maybe unpack all the positives and negatives on a per share basis to the guidance change? And you clearly have the investments that you made for the Colony loan, Le Groupe Maurice, the Duke asset, the earlier timing on the equity to fund that, to some dilution and so the equity stays on your balance sheet. You talked about weaker core in the SHOP, better office. You just mentioned the $0.02 addition on the Paragon, lower cap rate on the sales. If you can just sort of tally up, here are the things that are positives and here are the things that are negative that equal the positive 3, that would be helpful? And then I have a follow-up after that.

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

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Good laundry list, Michael, but we'll streamline it for everyone.

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [77]

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Yes. I'll try to simplify it down. So Colony, clearly, not in original guidance now. And we talked about that being $0.05 for a full year leverage neutral, so this is half-a-year, call it, $0.025, good guy. Paragon, not in -- now in $0.02 good guy. The partial offsets include the equity drag, because we funded early on LGM, and property insurance premiums, which I noted in the prepared remarks. We have renewal in this very tight market and each of those are about $0.01, that gets you to $0.03 at the midpoint.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [78]

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And then you're saying the SHOP and the office negate each other from a per share perspective?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [79]

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Yes, all still in the range.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [80]

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Okay.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [81]

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Yes, the company same-store property is consistent.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [82]

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Right. And then just trying to -- if we go back to SHOP and you had your Investor Day mid-June. I guess, at what point did the SHOP start to underperform your full year expectations? Was it a 2Q issue? Or is it, as you reforecast post-Investor Day that the second half either from a rate occupancy and expense perspective was different from what you forecasted in February? It just feels as though things have moved faster to the negative in a short period of time from a forecasting perspective, which then calls into question the confidence in -- and I understand this probably is coming down in '20 and '21. But if you can't get the numbers accurate in a short period of time, what sort of confidence can we and investors have about the go forward?

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

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Yes. Well, Michael if you were sitting around the table here over the last 6 months, there was really no news in terms of SHOP in our expectation, and so we haven't seen the change. Everything, right through the P&L, is very much in line with guidance in February. And there is a range, of course, and we're within that range. So there's absolutely nothing that's changed in our view since Investor Day. There's nothing that's changed for our outlook. If there were, we would have said something when we stood up in front of you a month ago. So our conviction remains the same.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [84]

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But you are trending towards the low end of the range you provided in February and sort of showcased late last year, right? I mean, there is a change?

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [85]

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Well,

(technical difficulty)

[5%] higher than others, and the most important point is that, as a company, everything is in line kind of with our company range and within the ranges by segment. So very consistent with our February outlook, and in the SHOP case, as Bob says, really even on the line items, and that should -- and does continue to give us confidence, not only in our full year forecast, but also in the multiyear framework that we laid out at Investor Day. So as I said, I think it's really a great time to be at Ventas. It's a great time to invest in Ventas. We have a lot of opportunity. We're excited, and we are in line with what we expected for 2019 or even better, $0.03 at the midpoint. So we're feeling good about that, and I hope everyone...

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [86]

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I get all that. Right. I get that. And Ventas is an organization, and you have all the levers to be able to pull the growth. And -- so I'm just focusing on the SHOP piece, because it was a big part of Investor Day. And being at the lower end of the range, I don't know, it seems like a change, at least on that piece, and I'm just trying to understand if it was something particular in the second quarter that would have caused it? Or something that you saw in the back half of the year that would allow you to trend lower, at least on a SHOP setting. All of the other things that you guys are doing from an enterprise perspective, you're not just a SHOP company. I get that. Investors get that. But I'm just trying to understand the change when it happened and why it happened?

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Robert F. Probst, Ventas, Inc. - Executive VP & CFO [87]

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Yes. There is no change in our view. Again, we were down year-over-year in the first quarter, call it, 2.2%, 2.9% in the second quarter. The profile of the P&L is very similar, and everything within the original expectations. So again, I can only say, it's very much as we expected.

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Debra A. Cafaro, Ventas, Inc. - Chairman & CEO [88]

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All right. With that -- so I think, Michael, that you are our last but not least questioner. And I really want to thank everyone for their time and interest in Ventas. I hope everybody has a great rest of the summer, and we will look forward to seeing you soon. Thank you.

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Operator [89]

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Ladies and gentlemen. Thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.