Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ventas Inc. (NYSE:VTR)

Q4 2008 Earnings Call

February 12, 2009 10:00 am ET

Executives

Debra Cafaro - Chairman, President, and Chief Executive Officer

Richard Schweinhart - Executive Vice President and Chief Financial Officer

Raymond Lewis - Chief Investment Officer and Executive Vice President

David Smith - Investor Relations

Analysts

David Toti - Citigroup

Karin Ford - Keybanc Capital Markets

Richard Anderson - BMO Capital Markets

Jerry Doctrow - Stifel Nicolaus & company, Inc.

Dustin Pizzo - Banc of America Securities

Omotayo Okusanya - UBS

Robert Mains - Morgan Keegan

Mark Afrasiabi - PIMCO

Brian Sekino - Barclays Capital

Rosemary Pugh - Green Street Advisors

Operator

Ladies and gentlemen, welcome to the fourth quarter 2008 Ventas Earnings Conference Call. My name is Tanya and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) I will now like to turn the presentation over to your host for today’s call Mr. David Smith. Mr. Smith please proceed.

David Smith

Good morning and welcome to the Ventas conference call to review the company’s announcement this morning regarding its results for the year in quarter ended December 31, 2008. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call maybe considered forward-looking statements within the meaning of the securities laws.

These projections, predictions and statements are based on management’s current beliefs as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ materially from to the company’s expectations whether expressed or implied.

We refer you to the company’s reports filed with the Securities and Exchange Commission including the company’s annual report on Form 10-K for the year-ended December 31, 2007 and the company’s other reports filed periodically with the SEC for a discussion of the forward-looking statements and other factors that could effect these forward-looking statements.

Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only as Ventas expressively disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.

Please note that quantitative reconciliations between each non-GAAP financial measure contained in the [audio dip] and its most directly comparable GAAP measure as well as the company’s supplemental disclosure schedule are available in the investor relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman, President and CEO of the company.

Debra Cafaro

Thanks, David. Good morning to all of our shareholders and our other participants and welcome to our 2008 year-end earnings call. 2008 was a positive year for Ventas, despite terrible market and economic conditions. During the year, we remained highly profitable and intently focused on liquidity, safety and balance sheet strength.

To stay financially strong, in 2008 we sold assets, expanded and extended our [audio dip], raised fixed rate mortgage debt, increased our equity base and limited our acquisition activity and forward commitments. We also delivered positive earnings growth in 2008 in spite of these defensive steps designed to protect and preserve shareholder value.

First, I want to recap some of the highlights of the year. Normalized FFO per share increased 2% in 2008 to $2.74. Our cash flow from operations was strong exceeding $364 million. We raised over $400 million in equity. We sold assets for $432 million and realized a gain of $47 million.

We raised $126 million in long-term secured debt at 6.5 %.on nine private pay senior housing communities. We opportunistically purchased $176 million of our bond due 2009 and 2010 at a net discount. We made about $300 million of accretive investments and commitments.

Total portfolio NOI on our 79 private K assets managed by sunrise senior living was $138.8 million, a 5 % increase over 2007 levels. And Ventas ended the year as one of the largest ten REIT’s. As a result of our efforts, which began in mid 2007 and accelerated in 2008, Ventas remains in an enviable position of safety with very attractive leverage of 40 % debt to enterprise value, net debt to EBITDA of 4.7 times and fixed charge coverage approaching three times.

Even more importantly, our total debt maturities through the end of 2009 now are only $118 million compared to net un-drawn capacity on our line of credit of $774 million. During 2008, we were proud to receive two positive rating actions. An upgrade to investment grade by Standard & Poor’s and a positive outlook on our investment grade rating by pitch.

Notably, Ventas received two of the only 12 total positive rating actions for [retail] by all three agencies during 2008. These positive rating actions reward our unwavering commitment to an investment grade balance sheet and our focus on increasing the safety of our enterprise.

In addition to our excellent balance sheet and liquidity position, we have a high quality portfolio of diversified healthcare and senior housing assets operated by superior care providers. Our tenants, such as Kindred, Brookdale and privately held senior care performed well during the challenging year.

Our property manager, Sunrise Senior Living has maintained average occupancy during the fourth quarter of 91 % in the 72 same-store stable community it manages on our behalf. During the balance of today’s call, I want to discuss our first quarter 2009 dividends, our portfolio performance and our outlook and guidance for 2009 then Rick Schweinhart will report in detail on our financial results, after which we’ll be delighted to take your questions.

Our Board of Directors has declared an all cash first quarter 2009 dividend of $0.51.25 per share. We believe our cash flows and balance sheet and our conservative dividend payout ratio support an all cash dividend. Ventas generates excellent cash flow, which we expect to continue in 2009 and we are pleased to share that cash flow with our shareholders.

Turning to a portfolio review, first I want to discuss our triple net lease assets and then turn to our operating segment. Ventas’s triple net lease assets continue to perform well, with good coverages and occupancies across the spectrum of independent living, assisted living skilled nursing facilities and hospitals.

We received 78% of our NOI from our strong pool multi-facility master leases and have credit and structural support and down size protection. The key take away here is that operating results in our triple net portfolio were stable through Q3 of 2008. With strong EBITDARM to rent coverage of 1.8 times.

Specifically, reporting on our 203 Kindred healthcare assets, from which we received 40% of our NOI. The cash flow coverages at our four Kindred master leases are excellent at 2.2 times. Kindred’s full balance sheet stands behind its rent obligations to us and the combination of long-term acute care hospitals and skilled nursing assets in the master leases provides additional reliability to our cash flows.

Medicare rates for sniff and LTACH increased meaningfully in the fourth quarter of 2008. We will see the impact of these increases in our fourth quarter property level results. In our senior housing triple net leases from which we derived 33 % of our NOI, cash flow coverage remains very good at 1.3 times, stable with prior periods.

Occupancies in this portfolio rose over 100 basis points in the third quarter of 2008 sequentially to 88.2 %. And many senior housing operators have already announced that fourth quarter 2008 occupancies were flat with the third. So, we feel good about where our triple net senior housing portfolio stands.

Remember that our pool multi-facility master leases represent the senior-most claim on a tenant’s cash flow. These leases are designed to provide Ventas with good, steady contractual cash flow, evens as occupancies and EBITDARM add inflow overtime due to the economy, reimbursement cycles or other changes.

Turning to our operating assets, the Senior Living and medical office building assets we own that are managed by others provide the granular highly diversified revenue streams in our portfolio. Together, they account for between 21% and 22 % of our NOI. Here to 2008 results met our expectations. First, we own 79 high-quality private pay senior housing communities in North America that are managed by Sunrise.

These assets contribute 18% to our company’s NOI. In this portfolio, total community NOI for 2008 was over $138 million within our anticipated range of results and 5% higher than 2007 NOI computed on a full year basis.

Total community NOI for these assets was $32 million in the fourth quarter. For an NOI run rate of $128 million. In the 72 same-store stabilized Sunrise communities, fourth quarter total community NOI was $29.4 million.

Although occupancy remains strong at 91% in the fourth quarter, it is down 70 basis points from the third quarter 2008. As we indicated earlier this year, we are seeing declining NOI and occupancy trends in the same-store stabilized communities that accelerated in the fourth quarter of 2008 as the result of extreme economic conditions. Bucking those pressures somewhat, our two Sunrise communities in lease-up showed 550 basis points of sequential increase in occupancy in the fourth quarter, improving to 63.7% from 58.2% in the third quarter of 2008.

Overall, the Sunrise portfolio held its own in a challenging market during 2008. Even increasing NOI by 5% versus 2007 levels, but the fourth quarter evidence as expected, a decline in NOI in occupancy. Finally, our MOB portfolio is a stable, growing segment of our business and now accounts for 3% of our NOI. Our portfolio consists of nearly 1.5 million square feet of mostly on-campus product. Our medical office buildings contributed $5.3 million in NOI during the quarter.

Looking at our 15 same-store stabilized assets, NOI increased 7% to $3.1 million in the fourth quarter of 2008 versus a year-ago period. One of the benefits of MOBs is that the cash flows should be relatively stable due to higher renewal rates. During 2008, renewals of expiring leases in this portfolio exceeded 80%.

Construction on our three medical office buildings under development remains on schedule with strong pre-leasing in place currently between 65% and 88 %.

Activity to lease the remaining space has been positive, so we do expect these to be successful projects. We remain committed to being a leader in the MOB space. At the end of 2008, we were doing business with six quality national and regional MOB developers, including five of the top 20 firms in the nation. We believe these MOB investments and relationships will create value for our shareholder. They advanced our strategic plan in a disciplined way and position us to expand this segment of our business rapidly when conditions are right.

On the disposition front, we sold 12 healthcare and senior housing assets in 2008 for $132 million an achieved a gain of $47 million. We continued this effort in 2009 by selling four private pay senior housing assets for $59 million and we expect to sell a hospital this quarter for $35 million, again all for a gain on sale. Kudos to our asset management team for being a profit center and managing these sales to successful completion in a difficult market.

Proceeds from our asset disposition were used to pay down our debt and further strengthen our balance sheet. We are not expecting any additional material dispositions in 2009.

Here is how, we are thinking about the full-year of 2009. Ventas has a great balance sheet, excellent liquidity, highly productive, high-quality diversified assets with strong demand drivers and constrained new supply. Access to multiple debt markets, a quality pool of tenant managers with scale and a management team that is stress tested. As such, we expect to manage through the current environment in excellent happy and to remain a profitable, cash flowing firm.

Our 2009 guidance is $2.55 to $2.65 per diluted share. At midpoint of this guidance range, represents our pro forma fourth quarter 2008 annualized FFO of $2.60 per share and assumes that Sunrise NOI is between $110 million and $125 million in 2009. We also assume that we will complete $200 million of fixed rate financing during the year to pre-fund 2010 debt maturity.

Our balance sheet strength and liquidity should enable to us to make opportunistic acquisitions when conditions are right. However, we have not included any acquisition accretion in our guidance, consistent with our past practice and due to the uncertainty about timing and size of any investment opportunity.

In any event, our first priority during 2009 will be to remain respectful of the severe conditions in the debt market and not reach for earnings at the risk of our balance sheet. We intend to take a very conservative approach to maintaining financial strength and flexibility during the year.

We understood the credit crisis early in mid-2007 and managed our firm aggressively to stay strong for the benefit of our shareholders. We will continue that approach in 2009. The good news is that so far this year, the unsecured bond market has improved significantly, although it is still light years away from the favorable conditions for issuers that existed in 2007. Still, after the carnage we experienced in the fourth quarter, I would say that a functioning bond market is a good bond market, as far as REITs are concerned.

Fannie and Freddie provide an additional important source of capital for Ventas and the GSEs continue to lend to the senior housing industry. We intend to use our large, high-quality portfolio of stable performing senior housing assets to obtain attractively priced long-term debt capital to meet our 2009 and pre-fund our 2010 debt maturity.

The bank market is the most constrained at the moment. Although we expect continued efforts by policy makers, we will improve lending conditions. We believe we will enjoy success in extending our line of credit beyond its current mid-2010 maturity. On the asset side, we remain enthusiastic about the benefits and strengths of healthcare and senior housing real estate.

We believe in the fundamentals of our business, which demonstrates excellent supply, demand characteristics; and there is no other segment of real estate that offers the long-term investment opportunities available in healthcare real estate due to the existing size of the market at about $700 billion and its projected growth to 20% of GDP.

For the nursing home and hospital assets we own, which generate 50 % on our EBITDA, our tenants and borrowers should enjoy stable to positive Medicare reimbursement through 2010.

Medicare rates for sniffs increased in the fourth quarter 2008 by 3.4 %; and they increased about 2.5 % for our LTACH as well. Med Tech has proposed flat to increased Medicare rates for fiscal year 2010. Additionally, state Medicaid programs should benefit from funding contained in the Stimulus Plan, which will in turn support hospitals and nursing home care providers. So, we have good visibility on stable to increased Medicare and Medicaid rates for our nursing home and long-term acute care hospital assets through the end of 2010.

Our Sunrise communities are excellent real estate assets in prime locations. While severe economic circumstances are challenging near-term performance, we believe that when the economy strengthens these Class A buildings should be a growth engine for Ventas.

In, sum as a company, we are in a great position, we remain quite profitable, we intend to stay strong and we are ready to drive growth when the time is right. In the meantime, we are happy to reward our shareholders with an all cash dividend. After Rick reports on the details of our year and quarter-end, we will be happy to answer your questions.

Richard Schweinhart

Thank you, Debbie. Normalized FFO per diluted for 2008 was $2.74 up 2% from 2007 $2.69. Normalized FFO for 2008 increased 16 % or $383 million from $331 million. Triple-net lease revenues grew to $460 million from $451 million primarily due to contractual escalations. Sunrise NOI was $138.8 million in 2008, compared to a partial year in 2007 of $90.1 million.

Medical office building NOI grew due to acquisitions and was $17.3 million in 2008, compared to $7 million in 2007. Interest expense increased to $203 million from $193 million in 2007, due to 2007 only containing a partial year of the Sunrise REIT acquisition offset by $400 million of debt repayments in 2008. G&A increased to $40.7 million in 2008 or approximately 4.4 % of revenue down from 4.8 % of revenue in 2007.

Weighted-average shares outstanding increased to $140 million from $123 million in 2007, due to our 2007 and 2008 equity offerings. Fourth quarter 2008 normalized FFO per diluted share was $0.66 stable with $0.66 in last year’s fourth quarter and down from $0.69 in the third quarter of 2008.

Triple-net lease revenues grew sequentially due to contractual escalations. Sunrise NOI was $32.2 million in the fourth quarter, compared to $33.7 million in the fourth quarter of 2007 and $35.2 million in the third quarter of 2008.

Medical office building NOI grew steadily from acquisitions and was $5.3 million in fourth quarter, compared to $3.0 million in the fourth quarter of 2007 and $4.8 million in the third quarter of 2008.

Interest expense decreased from both the fourth quarter of last year and the third quarter this year due to debt repayments. G&A was pretty much flat in the fourth quarter of 2008, compared to the fourth quarter of 2007 and the third quarter of 2008. The share account increased due to our August equity offering. Fourth quarter FAD per diluted share was $0.61 compared to $0.60 in last year’s fourth quarter and $0.64 in the third quarter of 2008.

Normalized FFO this quarter totaled $95 million, compared to $87.7 million in the fourth quarter of last year and $97.2 million in the third quarter of this year. Normalized FFO and earnings are reported after deducting minority interest. Normalized FFO decreased $2 million from the third quarter principally due to the NOI decrease in the Sunrise managed portfolio.

Our fourth quarter effective interest rate of 6.2 % improved from 6.7 % in the fourth quarter of 2007 and 6.5% in the third quarter of 2008, due to debt repayments and greater use of our LIBOR plus 75 debt revolver. At December 31, 2008, we had $177 million of cash and $300 million outstanding on our 850 revolving credit agreement with unused capacity of $546 million. We currently have net liquidity under the revolver of $774 million. Our debt-to-total capitalization is excellent at 40 % at year-end and our net debt to pro forma EBITDA is 4.7 times.

Beginning in 2009, as required by U.S. GAAP under APB 14-1, the company will recognize additional interest expense based on the company’s non-convertible debt borrowing rate on its $230 million, 3 7/8 convertible debt bond issuance. The non-cash interest expense will decrease 2009 FFO by approximately $4 million or $0.03 per share.

We are initiating guidance for 2009 to between $2.55 and $2.65. The midpoint of this guidance range is $2.60 per share, which is derived by taking our $0.66 reported in the fourth quarter FFO and proforming $0.01 quarterly dilution for the impact of the new convertible securities accounting rules that take effect in 2009.

This makes a $0.65 run rate fourth quarter times four for $2.66 annualized. Our key assumptions are; the total Sunrise NOI from our 79 assets ranges from a $110 to $125 million constant foreign exchange rates, all of our tenants continued to pay rent, we borrow a couple $100 million of fixed rate financing and G&A will be flat with the fourth quarter annualized.

Our guidance does not include material unannounced acquisition or divestiture activity or to about liquidity. We have included additional debt maturity tables and debt covenant reporting and both our supplemental data and our website. Excluding normal amortization payments, 2009 maturities are at $118 million and 2010 maturities excluding the revolver total of $289 million.

To recap, we have focused on our balance sheet, which is strong. We have excellent liquidity, our fourth quarter normalized FFO per share was stable and we look forward to continued stability in the results for 2009.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Bilerman - Citigroup.

David Toti - Citigroup

First question relative to some of recent dispositions that was pretty widespread in implied cap rates. Can you provide some color as to that range?

Debra Cafaro

Which dispositions are you referring to so I can be specific?

David Toti - Citigroup

The December dispositions and the January dispositions.

Debra Cafaro

Yes, we can definitely do that. The December dispositions were at about a 6.7 cap on rent and those were a negotiated transaction and I think very favorable pricing. On the January transaction and sale that was about 8.5 % cap. That was pursuant to a preexisting tenant purchase option that within a portfolio we acquired from elder trust back in ‘03-’04.

David Toti - Citigroup

Okay. Thanks and then just moving over to the MOB space. It is still a pretty small percentage of NOI, but you seem to have fairly aggressive longer-term strategy. Can you frame out some of your objectives for that platform relative to size and whether or not you have preference for acquisition versus development growth?

Raymond Lewis

David. This is Ray Lewis. I think we have said overtime that we think our exposure to medical office space is underrepresented in our portfolio and I think overtime we’d like to see that become more like 10% of our run rate revenues. We’ll probably focus more on acquisitions versus development. We’ll probably use development as a way to enhance our yields. But our primary focus will be on acquisitions as and when the market conditions are right from a capital raising and yield perspective, we’ll continue to grow that space.

David Toti - Citigroup

Thank you and just one last question. Is there any update on the lawsuit against HCP?

Debra Cafaro

Yes. That lawsuit is scheduled currently for a jury trial in the western district of Kentucky in August of this year.

Operator

Your next question will come from the line of Karin Ford - Keybanc Capital Markets.

Karin Ford - Keybanc Capital Markets

Can you talk about just from what your underlying assumptions are in the $110 million to $125 million expectation for Sunrise NOI in ‘09? Just talk about occupancy, margins underlying it.

Debra Cafaro

Yes, great I’ll turn that over to my partner, Ray.

Raymond Lewis

Yes, so I think if you look at the fourth quarter run rate $32 million times 4 year at about $128 million. If you assume sort of flat revenues and then maybe 2% or so expense growth that will get you sort of to the upper end of the range. I think, as we look out next year visibility in the general economy, I think is pretty difficult to garner.

So, we think NOI will likely run a little lower in the first half of the year due to normal seasonal softness and the continued economic challenges. We are hoping that it will recover in the second half and improve, but it may not. So, on the downside, we are assuming that occupancies average about a 150 basis points lower throughout the year and rates drop by about 150 basis points on average during the year and if you couple that with the 2 % expense increase that would get you to the bottom end of the range, which we believe is conservative, but is something that the bottom end of what we would expect.

Karin Ford – KeyBanc Capital Markets

Next question is just on the balance sheet. You mentioned you don’t plan any additional asset sales for the rest of the year. Should we take that to mean that you guys are comfortable with the sort of overall leverage position where you are today? And that we shouldn’t see expect to see any additional de-levering from here?

Debra Cafaro

Well, we are very comfortable with our leverage position. We’ll continue to look at the portfolio for opportunistic dispositions, but we are not penciling any end beyond the announcement that we have. We have tremendous cash flow that we can use even after payment of the cash dividend to continue reducing our debt balances.

Karin Ford – KeyBanc Capital Markets

Do you have an estimate as to how much the de-levering activities of 2008 and then sort of the negative spread and the cost to carry on the cash that you are holding on your balance sheet has on your ‘09 guidance? Do you know how much that affected the numbers?

Debra Cafaro

Not really, because we just started with the world as it is, but clearly the defensive step that you take to hold cash to make sure that you are reducing leverage and to potentially term out debt and push out maturities by taking on new fixed rate debt does have a diminishing impact, obviously on earnings growth and that’s based into our new guidance range for 2009.

Karin Ford – KeyBanc Capital Markets

Just a final question, looks like you guys have some substantial rollovers coming in 2010. Just was wondering if you guys are starting to work on those rollovers already this year and if so, what your expectations are for rent?

Debra Cafaro

Most of our rollovers are really Kindred 2010 renewal and it’s about 100 and a handful of assets and when this occurred in 2008, Kindred renewed all of the assets and like the 2008 renewals, the 2010 renewals have really excellent cash flow growth. So, I mean they are very important to Kindred’s business. So, we are looking forward to renewals on those.

Operator

Your next question comes from Rich Anderson - BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Maybe just to dissect a little bit the ‘09 guidance if I could, the $0.04 I guess there is $0.03 or $0.04 convertible notes charge may not have been in the consensus number of 282, but the other factor that may be beyond the Sunrise occupancy declines and all that sort of stuff is foreign exchange. You mentioned that you expect it to be sort of stable over the course of the year, but on a year-over-year basis, do you have an estimate of how much foreign exchange might have impacted your guidance relative to 2008?

Debra Cafaro

Well, where we are starting is really the run rate for the fourth quarter adjusted for a penny a quarter in the convert accounting, which takes effect in 2009. So, that’s the 260.

Rich Anderson, BMO Capital Markets

Does the fourth quarter run rate compare to the previous quarters of 2008, I guess is the question?

Debra Cafaro

Well, I can tell you that the Canadian dollar weakened considerably in the fourth quarter versus the third, as you know you’re with a Canadian firm; and the impact was over $1 million in the quarter on NOI relative to the Sunrise portfolio. So, it was significant. Now, we’re assuming that fourth quarter 120, let’s call it exchange rate persists in 2009, so changes will be embedded. Any changes up or down, are embedded essentially in the Sunrise range of NOI that we have provided, but, if it changes wildly from the 120, it obviously would have a bigger impact, but we’re just assuming 120 throughout 2009.

Rich Anderson, BMO Capital Markets

Okay. So there is a meaningful impact year-over-year on your guidance relative to 2008.

Debra Cafaro

Curios on the NOI, there is less impact on FFO because we borrow in Canadian dollars, maybe half of that.

Rich Anderson, BMO Capital Markets

So, I think that had offset hedges it?

Debra Cafaro

No, it is hedged on the FFO side, but it is significant when you look at Sunrise NOI and things like ADR, because the Canadian portfolio is 15% to 20% of our total Sunrise portfolio, so it is significant.

Rich Anderson, BMO Capital Markets

Okay. Any update on Sunwest?

Debra Cafaro

Yes, that’s going well. We had receivers appointed for the four assets and the assets are sort of break-even cash flow NOI. We expect the foreclosures to be completed in due course and our asset management team is working to maximize value on those.

Rich Anderson, BMO Capital Markets

All right, so then you have a new management team in place? Or considered to take over the operation of the assets?

Debra Cafaro

Absolutely, we are ready to go.

Rich Anderson, BMO Capital Markets

But you haven’t disclosed who that is yet?

Debra Cafaro

No.

Rich Anderson, BMO Capital Markets

Okay. Do you have any, although I know it’s not in your guidance, do you have any designs on doing more debt pre-purchases for a gain in 2009?

Debra Cafaro

Well, as you know, we exclude those gains from FFO and if I told you, I’d have to kill you. So, right now we’re assuming that those stay outstanding.

Rich Anderson, BMO Capital Markets

I may not mind.

Debra Cafaro

It is not so bad.

Rich Anderson, BMO Capital Markets

Ray, for you, the 6.7, or 8.5 was a pre-purchase. So when we look at the 6.7% Cap rate on the asset sales in December, how would you say that compares to maybe a year-ago where those assets could have been sold at?

Raymond Lewis

Rich, I think looking at the market right now, it’s pretty difficult to gauge what Cap rates ought to be. I think there is just not a lot of data and whatever data there is, is kind of noisy because they are either not ARMs length transactions or they are sort of distressed situations. So, I have a lot of hesitancy about taking a Data Point in this market and putting too much weight in it and saying that’s what the market is. I think it’s safe to say that Cap rates have increased over what they were a year-ago and they’ve increased in an order of magnitude of 100 to 200 basis points. I would say at a minimum.

Debra Cafaro

I would say, Rich that in an ARMs length, transaction in this market, what you would see in senior housing is a little bit what you see in multi, which is that the existence of agency financing for the buyers is keeping cap rates in our sector in a much closer range to where they were a year or two ago than you are seeing in other real estate asset type because debt drives value in real estate and so to the extent that the agencies were able to provide Meredith, which bought the December assets with attractive financing at 6 % or lower, that 6.7 cap rate worked for both sides. So, it’s a real advantage in term of doing net asset values for our sector. It’s an advantage in term of owning a good, large senior housing portfolio.

Rich Anderson, BMO Capital Markets

When did you start working on that portfolio sale?

Debra Cafaro

It was pretty recent. I mean it was in the late third and fourth quarter. It was not one of the ones that lingered for 12 months or something.

Rich Anderson, BMO Capital Markets

Okay, last question. Your counterpart HCN got added to the S&P 500 recently and you guys are neck-and-neck in terms of the size of the organization. With that in mind, do you have any sort of designs on the company being added to the S&P 500? Or is it sort of you just wait for the phone call?

Debra Cafaro

I mean, we have designs on being an excellent company that rewards our shareholders and that’s our obsessive focus that has been true for the last ten years and will be true for the next decade. That said, I think it’s great for our industry when the healthcare REIT’s are recognized by the major indexes and included in the indexes and I would hope that we have the characteristics going forward that will allow the index committee to include Ventas as well.

Operator

Your next question comes from Jerry Doctrow - Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

A couple things, in the quarter the G&A was bit higher than, I think we had been running and again, since it is built into your guidance. I was wondering, if I could get a little bit more color as to why it’s kind of popped. I think on a percentage revenue basis it’s closer to 3.8. I think we had it maybe a three earlier in the year. Are the litigation costs or cost of their transactions, or other things and it’s all of that stuff really we should be assuming continues?

Debra Cafaro

I think you said, you should assume that it’s a run rate of about 44 and it is a combination of factors; professional fees, stock-based comps, etc. and we do expect that to continue. I will tell everyone listening also, this hasn’t seemed to have been coming up in other calls, but the accounting rules are changing in ‘09 also to acquire the expensing of yield cost that would have typically been capitalized. I think most people like us will exclude those from normalized FFO, but that is an accounting change that you should be aware of.

Jerry Doctrow - Stifel Nicolaus

Okay, but you’re comfortable with that as a run rate?

Debra Cafaro

Yes we are.

Jerry Doctrow - Stifel Nicolaus

Back to Sunrise, maybe it has been discussed already. There were a couple of things. One is in some of the NOI numbers you were sort of backing out the impact of currency exchange. On the average daily rate drop, thinking particularly the quarter-to-quarter change? Is that adjusted for currency or that just there is a little bit of currency baked in there and again, I was also wondering we have had a number of people now pre-announced where they are talking about flat occupancy and rate increases. What color you can give us and why Sunrise rates are declining while others may not be, even your own triple-net?

Debra Cafaro

Jerry, one point of clarification is, in giving the range, we’re assuming the same exchange rate of 120, but we’re not really excluding changes. That’s sort of baked into the numbers, if there is variation, but our assumption, you have to make some assumptions and so the assumption is it is 120 and on the ADR that you’re talking about in Sunrise, virtually all of the decline in the fourth quarter versus the third was because of foreign currency changes. That went from basically one-to-one to weakening Canadian dollar at 1.2. So, it’s almost all should be diverse to that.

Raymond Lewis

In U.S. just a little more color on a U.S. was basically flat on ADR.

Jerry Doctrow - Stifel Nicolaus

Okay, I thing I had changes somewhat the picture, for the deterioration you get on the particular so metrics. So, even so though, you saw other companies talking about, I guess you probably year-over-year rate increases. Say, at best, your numbers maybe before flat. Any just more color? I mean the Sunrise reputation impacting it, do you think? Or is there anything else you can give us as to what the dynamics maybe are in that portfolio?

Raymond Lewis

No. I think there are a couple of things that are going on. I mean there’s been some promotional pricing at the assets in order to move vacant units. I think that has sort of flattened out the rate. But I don’t think that’s any different than other operators. I mean, I think as we look at what we have been doing in January, we have seen, on the turnover, they been able to push through 3% to 5% increases without a lot of resistance but, on the move ins, if you assume that they are going to be giving away a month free or whatever as a promotion, that’s going to offset that annual increase on your existing residents and could in fact, decrease ADR slightly throughout the year.

Jerry Doctrow - Stifel Nicolaus

Just shifting gears, the drip numbers, in term of numbers of shares and stuff were down in the quarter, I think compared to what you had before, again you are projecting that out. So is there anything else going on with the drip and does that assumption seem reasonable to go forward with?

Richard Schweinhart

This is Rick Schweinhart. Nothing is really going on with it. It is running pretty flat.

Debra Cafaro

Jerry? We gave you your decimal, come on.

Jerry Doctrow - Stifel Nicolaus

The only other detail is, can you tell us what’s through finally outstanding on the 8 and three quarters. You bought back some and you back bought of the other one.

Debra Cafaro

There is less than $50 million outstanding May 1, of ‘09 8 and three quarters.

Operator

Your next question will come from the line of Dustin Pizzo - Banc of America Securities

Dustin Pizzo - Banc of America Securities

Debbie, in your opening comments you were talking about the unsecured market, I mean you said that it is improved, but it is obviously still broken in a big way. Have you tried to gauge at all where your costs would be if you were to go in and raise unsecured today?

Debra Cafaro

Yes. I would, I think take exception with the idea that it is terribly broken. I think it is expensive compared to where it was in 2007. But, compared for example, to the CMBS market, which is closed, I think having access to debt capital for real estate companies is a really good thing. We are very close to the debt guys. I would say that if we went to market on a five-year, we’d probably be in the low 9s. And then a 10-year, we’d be higher than that.

Of course, it changes everyday. But, there has been $80 billion or so of investment grade issuance this year, which is a staggeringly good number. The fourth quarter, I mean it was just the fourth quarter it was horrible, it was carnage. I do think and I know that certainly investment grade REIT’s and particularly those at the high BBB and A ratings, I do believe they could access the bond market. Yes, it would be expensive. But, you know what? Access to capital is a really good thing.

Dustin Pizzo - Banc of America Securities

I know you guys are being cautious, but obviously you are probably looking at some opportunities out there. I mean, have the yield and return hurdles that you are working through moved at all? I guess, either way, are you in the mid teens today? Are you in the 20s on things that you are looking at from an IRR perspective?

Debra Cafaro

Yes, I would say we are being very judicious with capital. We have used our capital principally to improve our balance sheet and buyback bonds at a discount, our near-term maturities. And we also would use very selectively discreet amounts of capital to do good deals for Ventas that also improved the profile of important relationships. So, we think that would be kind of a win-win situation. On new investments, I would say, we are going to have a high bar and I’ll let Ray address whether you’d be looking at mid teens or what have you, but we are going to be very judicious.

Raymond Lewis

I really think it is a function of your cost-to-capital at the time that you are considering making the investment. I think as Debbie said, up until this point I think in the near-term, we are focused on continuing to maintain a strong balance sheet and have liquidity and as the market continues to improve its functioning on the debt side, which will lead to hopefully more stability on the equity side we’ll get a better deed on what the cost of capital is and be able to price an accretive spread over it, so it’s a moving target, unfortunately. I think it’s right now, if we were to put capital out it would be opportunistic and by definition those would be higher returns.

Debra Cafaro

Yes and we are definitely positioning the company to be able to take advantage of those opportunities when they arrive.

Dustin Pizzo - Banc of America Securities

The interest in other income lines this quarter; was the fall there primarily just due to the decline in rates in market or was there anything one-time in there last quarter?

Debra Cafaro

We had a non-recurring pickup of $1 million or something last quarter.

Operator

Your next question comes from Omotayo Okusanya - UBS.

Omotayo Okusanya – UBS

Just a couple quick questions. Given the overall cautious view of the credit market and the economic backdrop going into 2009, how do you think about renewing the line of credit come mid ‘10, what rates could potentially go to? And is there any risk in regards to what the size of the line could look like going forward? And then again, just according to pre-fund or your plan of pre-funding some of the 2010 debt maturities, what do you kind of think your funding cost look like when you pre-fund versus what they look like currently?

Debra Cafaro

Those are important questions. We have enjoyed really good support from our lenders for the last ten years and we feel confident that we will be able to extend our line of credit before it matures in mid 2010. That said, we recognized that the banks are under pressure and maybe we’ll loose a little capacity and certainly we’ll have to increase pricing, but the revolver is really a short-term use of capital for working capital and acquisitions until we do long-term funding and so, we are happy to renew it and to pay market the rate in order to do so. If we pre-fund 2010 debt maturities, I would say that our cost of funding on a long-term, ten-year basis, is going to be higher than 7. If you look at the, if you are doing secured sort of Freddie and Fannie and if we, for whatever reason decided to tap the bond market, it would be at rates then obtaining in that market.

Omotayo Okusanya - UBS

Then with the ‘09 guidance, Sunrise NOI of 110 to 115, is that for the, just for your portion of the NOI? Or is that the entire thing?

Debra Cafaro

The range of 110 to 125 on Sunrise NOI is really the total community NOI, which is how we report it consistently

.

Omotayo Okusanya - UBS

Since the quarter has now passed, has your view in regards to the outlook for Brookdale or Sunrise changed in anyway versus the last earnings call?

Debra Cafaro

I think, consistently we think Brookdale is a good company that is going to weather this; they have a very cycle-tested management team. We have a lot of confidence in them. On the Sunrise spread, I think they are showing that they are working through their corporate balance sheet issues and their banks have been working with them and so, I think pretty much status quo view on Sunrise.

Omotayo Okusanya - UBS

One quick question for Ray, could you just give us a sense of what you are seeing in the market right now with cap rates across the different property types?

Raymond Lewis

As I said earlier, it’s a very difficult market in which to define what cap rate should be. I think we’ve seen a couple of transactions probably the most notable was the portfolio of Sunwest assets that was purchased by Lone Star and that’s sort of a mixed bag. There is some nice stuff in there, there is some stuff that is probably not as attractive and that was pegged at a nine cap from the information that I have seen, but again, with the problems that Sunwest is having it is not really sort of a market transaction, as much as it is a liquidity need that’s being filled there. There is just not enough data points in the market to be able to sort of state with confidence what things would transact at right now.

Omotayo Okusanya - UBS

If you were to guess on the hospital side and as well as on the sniff side, what would you say?

Debra Cafaro

Well, we are selling a hospital for seven to eight cap on rent this quarter. So that’s about the best information that we can provide.

Operator

Your next question comes from Robert Mains - Morgan Keegan.

Robert Mains - Morgan Keegan

Could I take Tayo’s question kind of one level higher, Ray? Realizing there is a kind of a posse of transactions out there. Is there any change that you can see in the type of assets that are kind of crossing your desk?

Raymond Lewis

When you say type?

Robert Mains - Morgan Keegan

Hospitals versus senior housing versus nursing homes. Are there any, looking forward to when the capital markets loosen up in their transactions again, are there any asset classes that you think there is for sale of now than there were when the curtain came down?

Raymond Lewis

No. I haven’t seen any sort of shift; I would say generally, if people aren’t bringing assets to market at this moment in time unless they have to. I think they’re probably are a few more senior housing assets just because of what Debbie described and that there is financing available through the agencies for those assets, but I think when the market shifts it’s going to be driven by capital availability. I think we’ll see pretty good opportunities across the board.

Robert Mains - Morgan Keegan

Fair enough and then one Sunrise question, if you X out the FOREX issues. Is there a difference in the performance that you are seeing in the U.S. and Canada? Is it any better north of the border than here?

Raymond Lewis

Well, I think the Canadian occupancies have been stronger than they have in the U.S. they certainly haven’t experienced the same issues that we had here in terms of the housing market. I mean, certainly they are not insulated from the general economic conditions, but they didn’t experience the same housing bubble. The occupancies have been strong up there, so yes, I think there is a little bit better performance on the top line in those communities.

Robert Mains - Morgan Keegan

Is pricing equal in both areas? Or is that strong in Canada, too?

Raymond Lewis

Well again, I think if you have got a better occupied community, you can push pricing a little bit more.

Operator

Your next question comes from Mark Afrasiabi - PIMCO.

Mark Afrasiabi - PIMCO

Just on the bond DOI, I have a few questions. Just on the 2010 bonds. What’s the outstanding on that one now, six and three quarters ‘10?

Debra Cafaro

About 135.

Mark Afrasiabi - PIMCO

Okay and then in terms of timing for the bond deal that you might bring, you mentioned, is there any further ability to kind of just tell us how you’re thinking about timing that?

Debra Cafaro

Maybe we can do a deal right here on the phone.

Mark Afrasiabi - PIMCO

I’ll take it a 12 %.

Debra Cafaro

I think that we didn’t say we were going to do a bond deal. We are looking at indicative pricing. We are monitoring the market regularly with people who have good visibility on to the market and our whole job, since mid 2007 through 2008 and into 2009 is not to have to go to the market. I think we need to keep that objectives and so you will be our first call, when we’re ready.

Mark Afrasiabi - PIMCO

I have a couple more. In terms of Moody’s, they seem to be lagging in high yields rating territory, high BB, but have you made any progress there? Do you think you have any insight on when they might actually follow pitch and S&P?

Debra Cafaro

We believe that we deserve three investment grade ratings. We’re committed to that and we had continued our dialog with all the agencies to that point.

Mark Afrasiabi - PIMCO

In terms of the use of secured debt, I thought I heard you mention something about secured debt potentially in the sort of 7% to 8 % range. As I think about your capital structure, are you still essentially thinking of an unsecured bond capital structure?

Debra Cafaro

Absolutely, it is consistent with our aspirations, our commitment to an investment grade balance sheet in our own business plan to overtime, reduce our reliance on secured debt. At this particular time in the market, it is a huge benefit including to our bondholders to have access to good, attractive, long-term fixed rate capital in modest amounts through the agencies. So, I think you’ll see us continue overtime with our plan to reduce reliance on secured debt and maintain an unsecured bond profile.

Mark Afrasiabi - PIMCO

One last question, just I guess more of a perhaps theoretical, but certainly seems like it could be practical, too. With bond yield, for example around 9% to 10 %, basically lately for unsecured bonds, that would imply like the cost of equity has to be back of the blond so sort of, is it nine to ten on the bonds. Your cost of equity is north of nine to ten into the double-digits?

Debra Cafaro

I can’t disagree with that logic.

Mark Afrasiabi - PIMCO

So, therefore given that and given your cost of debt doesn’t really get the tax shield benefit. If you think of weighted-average cost of capital it can’t be less than 9 % and therefore I’m trying to reconcile that with cap rates under 7 %. How do you kind of think about that in terms of valuing assets with a cap rate of 6.5% or 7%?

Debra Cafaro

I think again. It goes exactly to what we talked about is that we’re seeing some buyers in senior housing business paying cap rates of 6.5% to 9 %, let’s call it. That’s being driven by access to let’s say 6 % to 7 % agency financing and that is relatively, those numbers work. Another asset type in real estate, I think you would not see the same low cap rate, exactly because you cannot obtain good debt capital to acquire those assets.

Mark Afrasiabi - PIMCO

As you look at your company, if you were to buy an asset.

Debra Cafaro

I didn’t say we were buying assets at that cap rate. Is that be said the office is.

Mark Afrasiabi - PIMCO

No, I hear you on that just going forward. If you were to you’re buying asset given your bond yields and your cost of equity, like we went through the math. Would it make sense to do a deal at a cap rate like less than 9 %? Is this just you’re not really like mark-to-market, you are sort of M&A, internal M&A, acquisitions to your current capital structure on mark-to-market?

Debra Cafaro

We care deeply about your cost of capital as it relates to our acquisition yields and what we just talked about in terms of what the hurdle would be for investments in this current environment.

Operator

Your next question comes from Brian Sekino - Barclays Capital.

Brian Sekino - Barclays Capital

Most my questions have been answered, but one last question here. It looks like in your lease-up portfolio; the occupancy increased substantially despite moving what I presume is the higher occupancy facility to the stabilized portfolio. Can you kind of discus what the dynamics in those markets were, were those two remaining lease-up facilities there?

Debra Cafaro

Yes, absolutely. We have two lease-up assets as you said. Indeed, occupancy increased sequentially by 550 basis points, which is strong. One of those assets is in Canada. It’s a really kind of four seasons-quality, large independent living community and occupancy there rose dramatically in the quarter. It is in earlier stages of lease up so, that’s why I think you are seeing a bigger move there, both because the building is bigger and it’s at an earlier stage so it moves the needle more.

Brian Sekino - Barclays Capital

Do you have any expectations for when the lease-up for both of those will be complete?

Debra Cafaro

Well, we just view it as a trend. I mean --

Raymond Lewis

Well, I think the only asset we’ll have in lease up for most of next year will be the Canadian assets, the Steele’s asset and so, and that we’ll continue to lease-up through the balance of this year and into the next year.

Debra Cafaro

Yes, I think we had originally said stabilization in Steele’s was 2010, 2011 something like that. It’s a very large asset.

Operator

Your next question comes from Rosemary Pugh - Green Street Advisors.

Rosemary Pugh - Green Street Advisors

First question about MOB’s I understand that on the whole demand for medical office buildings is more elastic than other property type, but what about the pace of lease-up for recently developed or un-stabilized assets? Does the slow lease-up of Ventas is un-stabilized properties reflect that sensitivity?

Debra Cafaro

I didn’t understand exactly the question.

Rosemary Pugh - Green Street Advisors

Well, I guess I noticed that the MOB in lease-up, the two MOB’s in lease up have been have not made much lease up progress over the past year and I was wondering if you would attribute that to more generally to lease up of MOB’s in this economy or is that the particular assets?

Debra Cafaro

There is one particular asset in that that has definitely not met our lease-up expectation. On the three MOB’s that we have in development, those were substantially pre-leased. We’ve got 65% to 88% pre-leasing activity there and good activity to drive those to a successful outcome. So, I would say that there is no part of real estate or business generally, that’s immune from these powerful negative trends we have in the economy, but I would say that the lease-up assets that we have, that you are referring to, it’s really more just one specific asset that hasn’t met our lease-up expectations and on the three that we have ongoing, I mean those seem to be going relatively well.

Rosemary Pugh - Green Street Advisors

Then on the Ameritas deal that was done, how much did the seller financing affect the price?

Debra Cafaro

Our financing as opposed to debt GSE financing?

Rosemary Pugh - Green Street Advisors

Right, the $10 million loan that you made to Ameritas?

Debra Cafaro

I mean I think it affected it minimally. I think what was a much bigger driver was the level of proceeds and the 6% or lower GSE financing.

Rosemary Pugh - Green Street Advisors

And then why did routine CapEx increase in the fourth quarter and what’s your forecast for ‘09?

Debra Cafaro

Good question that Ray will talk about sort of how CapEx tends to trend during the year and why it was in the fourth quarter and what our expectations are for next year.

Raymond Lewis

I think there is a lot of projects that get started mid-year and accelerate in the fourth quarter of the year as people are finishing up their budgets and completing a lot of their CapEx projects for the year and heading into the next year, when we sort of reset the bar I think we are looking at $7 million to $7.5 million CapEx budget for our Sunrise portfolio next year.

Debra Cafaro

Yes, I mean a lot of it’s human nature and it’s very consistent with what you see in real estate which is, if someone has the CapEx budget and they don’t get around to spending it and they realize they might not keep it if they don’t use it. They tend to use it in the fourth quarter.

Operator

And there are no further questions at this time. I will now like to turn the call over to Debra Cafaro for closing remarks.

Debra Cafaro

All right Tanya. I want to thank everyone for joining our call. We really appreciate your interest in the company. We look forward to seeing our investors at the upcoming city conference and thanks again for dialing in.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ventas Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts