Ventas Q2 2009 Earnings Transcript

Jul.31.09 | About: Ventas Inc. (VTR)

Ventas, Inc. (NYSE:VTR)

Q2 2009 Earnings Call

July 30, 2009 09:00 AM ET

Executives

David J. Smith - Investor Relations

Debra A. Cafaro - Chairman, President and Chief Executive Officer

Raymond J. Lewis - Executive Vice President and Chief Investment Officer

Richard A. Schweinhart - Executive Vice President and Chief Financial Officer

Analysts

Dustin Pizzo - UBS

Ross Nussbaum - UBS

Jerry L. Doctrow - Stifel, Nicolaus & Company

Karin Ford - KeyBanc Capital Markets

David Toti - Citigroup

Michael Bilerman - Citigroup

Richard C. Anderson - BMO Capital Markets

Jim Sullivan - Green Street Advisors

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2009 Ventas Earnings Conference Call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I will now like to turn the call over to Mr. David Smith. Please proceed.

David J. Smith

Good morning. And welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended June 30, 2009.

As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the Federal Securities Laws. These projections, predictions and statements are based on management's current beliefs as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2008 and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements.

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

Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure, as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com.

I will now turn the call over to Debra A. Cafaro, Chairman, President and CEO of the company.

Debra A. Cafaro

Thanks David. Good morning to all of our shareholders and other participants, and welcome to our earnings call this morning. My colleagues and I are pleased to be joining you today from our Louisville office. For today's call we are changing our format a bit. I will provide the overview, Ray Lewis will discuss our portfolio performance and Rick Schweinhart will address financial results in detail. After that the Ventas management team will be happy to answer your questions.

Our second quarter was excellent, and Ventas continues to be a cash flowing profitable enterprise. Cash flow from operations is growing significantly, up 17% from last year. Normalized FFO is strong at $0.68 per fully diluted share.

Our balance sheet and liquidity position are among the best in the REIT sector. And our diverse portfolio of high quality need driven healthcare and senior housing assets, including our Sunrise operating portfolio, are performing well through a sustained and deep recession. As we navigate through this difficult environment, we believe we are meeting the competing challenges of protecting the downside, while preserving the upside for our shareholders.

As a result of our year-to-date activities and results, we are increasing our full year 2009 normalized FFO per share to $2.55 to $2.62 per fully diluted share. We are also increasing our NOI guidance range for our operating portfolio of 79 high quality private paid senior living communities managed by Sunrise Senior Living. Our credit statistics, liquidity position and access to multiple capital markets are outstanding, with about four times debt to EBITDA, fixed charge coverage exceeding three times, no net debt maturities until 2012, virtually nothing drawn on our revolving line of credit, and over $100 million in cash on hand, Ventas is positioned to thrive in any economic or capital markets environment. This optionality is very valuable to our shareholders.

Fitch recently recognized the excellence of our liquidity and balance sheet by upgrading Ventas's debt ratings to BBB flat. We remain committed to our investment grade rating and moving up the credit curve and to optimizing our blended cost of capital. This year as promised we have demonstrated access to almost every market, bank, fund, equity, the agencies and assets sales.

Following on our successful line of credit extension and asset sale in the first quarter, we raised about $640 million in the second quarter from multiple sources. With this new equity and debt capital, proceeds of asset sales and our strong cash flow from operations, we retained or purchased over $400 million in long-term debt during the quarter, paid down our revolver balance to about $10 million and retained over $100 million in cash on hand.

I want to touch on two sources of our increasing liquidity this quarter. The $114 million TSC sponsored loan and the sale of 600 performing assets to Kindred. The TSC ten-year loan is secured by 16 senior housing assets. This collateral consists primarily of smaller assisted living and Alzheimer's communities in rural areas. The communities were valued at a 6.8% cap on rent and loan proceeds exceeded ten times Ventas' annual cash rents. We believe this is a great transaction for Ventas.

We were also pleased to close our sale of six underperforming skilled nursing assets to our tenant Kindred at the end of the second quarter. The transaction improved our portfolio, provides liquidity to Ventas and is another example of working collaboratively with Kindred management to create value for both companies. So, it was a productive quarter. Ventas is in an enviable, heads we win, tails we win position.

Here's what I mean by that. If the economy remains mired in a downturn, we have the liquidity and assets to manage through successfully and our need driven assets and triple-net leases should provide resilient cash flow. And with the new REIT balance sheet paradigm, it's four times debt to EBITDA, we are already there without the need for additional equity issuance. On the flip side in a recovery scenario, our operating portfolio and contractual debt escalation should provide lift from internal growth and our balance sheet capacity, low cost of debt and access to a variety of debt sources should enable us to make attractive acquisitions and deliver strong earnings growth to our shareholders. Either way you look at it, Ventas is in a great spot.

I'll now turn the call over to my partner Ray Lewis, who will discuss the performance of our triple-net lease and operating portfolio.

Raymond J. Lewis

Thank you Debbie. Our triple-net lease portfolio of diversified healthcare and senior housing assets continued to perform well at 1.8 times cash flow coverage.

We received 76% of our NOI from this pool, multi-facility master leases with credit and structural support and contractual growth escalation. These assets are spread across our portfolio of independent living, assisted living, skilled nursing and hospital assets, and exhibit stable fundamentals. Notably, this coverage for our current triple-net portfolio has remained constant at 1.8 times since 2007. The weighted average remaining lease term for our triple-net lease assets is between seven and eight years.

Importantly, during the quarter, Kindred renewed all 109 assets that were up for renewal in 2010, demonstrating the productivity of this diversified pool of skilled nursing home and long-term acute care hospitals. The leases for these properties will continue on existing contractual terms including escalation through 2015. So the takeaway from our triple-net lease portfolio, is that it continues to provide reliable cash flow and is diversified by tenant, operator geography, payor source and asset class.

Our operating portfolio consists of 79 high-end mansion style assisted living communities managed by Sunrise Senior Living and 22 medical office buildings. These operating assets provide us with granular, highly diversified revenue streams that account for 22% of our NOI. Our results in this portion of our portfolio were excellent this quarter and contributed to our guidance increase.

The key takeaway from our Sunrise managed operating portfolio are, that in the second quarter NOI and margin increased compared to the prior quarter, as a result a 1.2% higher average daily rate and lower expenses offset in part by lower occupancy.

Average stabilized occupancy for the second quarter came in at 87.2%, which is about where we expected it. As we discussed in our last call with you, we began to see signs of stabilization in occupancy during the second quarter. And occupancy seems to be holding and even modestly improving into July. It's encouraging to see the resiliency of this portfolio in the current environment.

Our Sunrise communities generated total community NOI for the second quarter of $33.9 million, roughly 19% of the company's NOI and totaled $64.4 million for the first half of 2009. For the balance of the year we expect roughly comparable revenues and occupancies, tempered by higher budgeted expenses such as utilities and repairs and maintenance, both of which tend to ramp-up in the second half of the year.

As a result of our reforecast and strong second quarter results from the portfolio, we are increasing our full year 2009 Sunrise NOI guidance to between $122 million and $129 million. This represents a significant increase in expectation versus our prior NOI guidance of $110 million to $125 million.

Although we have increased our Sunrise NOI expectations, we continued to be cautious about a second half economic recovery and Sunrise results will depend significantly on broader trends in the economy, the housing market, consumer psychology and unemployment levels. We do know that Sunrise management is working hard to improve its marketing and sales efforts and to continue controlling expenses, while staying committed to the goal of providing superior care to seniors, maintaining its premium brand and ensuring that our communities are in excellent physical condition.

Our medical office building portfolio did well this quarter. Ventas NOI from our 19 stabilized MOBs grew to $4.5 million in second quarter, up from $4.3 million in the first quarter. These stable assets are generating over 8% unlevered yields to Ventas on our total gross investment. The lion's share of our MOBs are on the campus of major hospital systems.

We also opened one development MOB in June in a burgeoning area of Greenville, South Carolina on the campus of a new hospital being developed by a well regarded, not-for-profit hospital system, Bon Secours.

Our new MOB is over 85% leased and the project was delivered on time and on budget. In sum, our operating portfolio delivered good performance in the second quarter.

Now Rick Schweinhart, our CFO, will provide you with a detailed review of our financial results. Rick?

Richard A. Schweinhart

Thank you, Ray. Debbie has already summarized on capital markets transactions in the second quarter in here today. Obviously, our successful transactions significantly affected our income statement balance sheet and cash flow for the quarter. There are a couple of data points I'd like to add and reinforce.

At June 30, we had only $10 million outstanding on our revolving credit facility and over $850 million of undrawn availability. The company's debt to total capitalization in the quarter end is excellent at 36%. Our credit stats were very good and are improving with net debt to pro forma EBITDA at 4.1 times and our fixed charge coverage ratio over three times.

As of June 30, we have less than $19 million in total debt maturities remaining in 2009 and $170 million in total debt maturities in 2010, excluding normal periodic principal amortization payments. Most of the debt maturing in 2010 is mortgage debt. Over time, we expect to continue using our high-quality large pool of stable senior living assets selectively to tap the attractive Freddie and Fannie debt market.

Turning to earnings in June quarter, second quarter normalized FFO was 105.1 million or $0.68 per diluted share. Normalized FFO includes a lease termination fee of $2.3 million and excludes the net benefits of $29.5 million composed of a gain on sale of assets of $39 million, the loss on early extinguishment of debt of $6 million and merger-related expenses and deal costs of $3.5 million. The trend line from first quarter to second quarter of 2009 was positive.

Normalized FFO per diluted share increased $0.01 to $0.68. Normalized FFO of $105.1 million was up 10% from the $95.7 million in the first quarter. Triple-net lease revenues grew to $116.8 million from $114.6 million primarily due to contractual escalations. Generalized NOI was $33.9 million compared to $30.5 million in the preceding quarter. The increase was principally due to an increase in the average daily rate, lower expenses and one more day in the quarter offset by lower occupancies.

Average occupancy in the stable assets climbed 180 basis points sequentially to 87.2% from 89%. Interest expense improved to $44.2 million from $46.1 million in the first quarter 2009 due primarily to our senior note purchases and debt repayments. G&A was $10.4 million, flat for the first quarter. Weighted average shares outstanding increased to 154.5 million in the second quarter versus 143.1 million in the first due to our successful April 2009 equity offering. Second quarter FAD per diluted share also turned positively at $0.66 compared to $0.64 from the first.

Next, let me compare the second quarter of 2009 normalized FFO per diluted share to the second quarter of 2008. Normalized FFO grew 8% to $105.1 million from $97.8 million last year. However second quarter FFO per diluted share was $0.68 compared to $0.70 last year, due to the 11% increase in shares outstanding this quarter.

Triple-net lease revenues grew to $116.8 million from $113.2 million primarily due to contractual escalations. Sunrise NOI was $33.9 million compared to $38.0 million last year. This reduction was principally due to $4 million of property level, expense credits and reconciliations in the second quarter of last year that did not reoccur in the current quarter. In addition, unfavorable movements in the Canadian dollar exchange rate had a negative impact of $760,000 on Sunrise NOI this quarter versus second quarter of last year. So big picture the portfolio shows stable NOI year-over-year essentially due to lower expenses offset by lower occupancy in the current quarter.

Also year-over-year our medical office building NOI grew to $5.4 million from $3.7 million due primarily the acquisitions and leasehold activity. Interest income on loans and investments was $3.3 million compared to $1.5 million last year, all because of investments we made in the last 12 months. The second quarter 2009 includes a lease termination fee of $2.3 million, while last year's second quarter contained a $1.6 million lease termination fee. Interest expense decreased to $44.2 million from $51.4 million last year principally due to debt repayments and purchases. Our weighted average cost of debt is 6.6%.

Weighted average shares outstanding increased 11% in the second quarter of 2009 versus the comparable 2008 period, to $154.5 million from $138.7 million. The share count increased due to our April 2009 and our August 2008 equity offerings. What is highly significant about this quarter's normalized FFO per share compared to the second quarter of 2008 is that our fully diluted shares outstanding increased 11% but our normalized FFO per share is only down 3% from $0.70 to $0.68.

Even more importantly, our second quarter 2009 cash flow from operations grew 17% compared with the second quarter of last year. This shows that our base business is performing well and that our assets and business are productive and reliable. It also demonstrates that we have strengthened our balance sheet from an equity issuance considerably while maintaining strong FFO per share of performance.

We are also increasing our guidance because of our second quarter results in our outlook. For our senior housing operating portfolio managed by Sunrise, we expect NOI for the full year to come in between $122 million and $129 million, up from our original projection of $110 million to $125 million. This represents a 7% increase in expectations. We are also improving our corporate guidance for 2009 normalized FFO per diluted share to $2.55 to $2.62 from $2.48 to $2.58 per share.

I'll turn the call over to Debbie to wrap up.

Debra A. Cafaro

Thanks Rick. We are delighted to deliver great second quarter results and improved guidance to our shareholders for the rest of the year.

During the balance of 2009 we'd expect to continue to reward our shareholders with a stable and secure all-cash dividend. We also expect our highly diversified portfolio of need driven assets to continue to deliver reliable cash flows.

During the quarter, we significantly enhanced the company's best-in-class financial strength and flexibility and received an important credit upgrade. We have demonstrated access to multiple markets and executed a thoughtful reequitization plan that we believe was both shareholder and debt holder friendly. We believe we are serving our constituents well during a period of disruption and uncertainty. More importantly, as a cash flowing profitable and conservatively financed enterprise, we are poised to continue our long track record of delivering excellent risk adjusted returns and protecting and increasing value for all of our investors.

With that, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Dustin Pizzo with UBS. Please proceed.

Dustin Pizzo - UBS

Hey. Thank you. Good morning everyone. Ross Nussbaum is on with me for help.

Debra Cafaro

Good morning.

Dustin Pizzo - UBS

Good morning. Debbie, couple of questions. First, strategically while you don't have any immediate liquidity needs, can you just elaborate a bit on Richard's comments that you look to potentially to take advantage of the attractive price gain versus issuing unsecured paper. Given the strides that you continue to make maybe you are just dealing with the fact that when you look at notes today in the five to seven year range it looks like they're trading in the 7% to 8% range.

Debra Cafaro

Yes, there's a couple of things I'd like to say in response Dustin. One year is our bonds are trading very well. The spreads on our bonds are maybe around 450 over. So our paper continues to issue and trade extremely well. And so we do have a good access to the unsecured debt market. As we have been moving up the credit curve we have been really conscious of maintaining a balanced capital structure, going more unsecured and less secured debt. We do think agency financing however is very attractive as it is pricing in the 6 to 7% range. And so, we had initially looked during the year to raise about $200 million of secured agency debt. And I think our comments today are consistent with that. And I think the last point I want to make is what we're really doing is replacing mortgage debt with mortgage debt because we do have in 2010 most of our maturities which is maybe 175 million or so is all mortgage debt. And so we will be keeping our secured debt ratios in balance. And we will be lowering our overall cost of debt, which is an important objective for the company as well.

Dustin Pizzo - UBS

Okay. And then it looks you've recorded about 5.5 million of merger-related costs. And well I think I already know what the answer is going to be, can you provide any more detail on what exactly those costs are related to?

Debra Cafaro

It's substantially all the costs of the ACP litigation and that's what's on that line.

Dustin Pizzo - UBS

Okay. So it's more legal related than deal related, it sounds like?

Debra Cafaro

Yes. We've been, yes. That's what's in that line.

Dustin Pizzo - UBS

Okay. And going as you look at the trial I guess commencing later during the summer. Is there a continued cost budgeted in the existing guidance?

Debra Cafaro

Those amounts are excluded between NAREIT FFO and normalized FFO. We've consistently added those costs back. And if you look at the table in the back of our press release, you'll see that for the year net in total of those kinds of adjustments we have maintained $0.10 to $0.11 per share range for all the items that are in there.

Dustin Pizzo - UBS

Okay. And I believe, Ross had a follow-up as well.

Ross Nussbaum - UBS

Hi everyone. Good morning. Just one follow-up. Debbie can you talk a little bit about as you think about acquisitions in this environment which niche of the healthcare world, do you find most attractive right now from a risk reward perspective?

Raymond Lewis

Hey Ross, it's Ray. I think we will continue to invest in all areas of healthcare real estate. The market that we see providing the most immediate opportunity is probably the medical office building space. As health systems are continuing to need capital for growth and as capital sources remain relatively constrained, they are looking at alternative funding sources such as REITs to provide capital for growth. They are looking to dispose off their medical office buildings. And so, we think there will be a consistent and increasing opportunity set in the medical office space. And we think that could be pretty attractive for us, both from a flow of opportunities and also a strategic desire to continue to diversify our portfolio into that area.

Ross Nussbaum - UBS

Thank you.

Operator

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Jerry Doctrow - Stifel, Nicolaus & Company

Thanks. A couple of my things have already been covered. I guess coming back to the Sunrise a little bit you touched on this I think saying expenses likely come up sort of the rest of the year. I was just wondering if we can get a little bit more color on what was going on in the quarter. I mean it was a dramatic improvement in the expense controls and margins. And just a little better sense of what's going on with that portfolio, maybe a little color on the lease-up property that kind of thing?

Raymond Lewis

So during the quarter Jerry I think you're right. The expenses were lower. I think it was pretty much across the board. We saw I think notably in utilities and repairs and maintenance which as we mentioned in our opening remarks tend to be spent more in the second half of the year rather than the first half. So, those were trending below budget and probably the most notable of the expense items. But in general, we saw that expenses were lower across the board.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. And just a couple of other things quickly. Healthcare reform and obviously your coverage ratios are very strong on the Kindred assets where the reimbursement risks are. But, how you do think about that? How should investors be thinking about what's coming out of Washington?

Debra Cafaro

Jerry I'll try that one. Good morning.

Jerry Doctrow - Stifel, Nicolaus & Company

Good morning.

Debra Cafaro

Just to give everyone some grounding, the proposed rule for nursing homes and LTACs are in place at about a 1.2% Medicare rate reduction proposed for fiscal year 2010 and a 2.2% increase in Medicare rates for the LTACs for fiscal year 2010. Those rules are proposed and typically the rules get better when they are finalized. And they'll be finalized in the next couple of days. So if the rules are finalized in their current form, we would expect there to be pretty stable and consistent EBITDAR in our assets in fiscal year 2010. And obviously if the rule spatters then that will be all for the good. As you look to -- and we do have as you mentioned over 2.2 times cash flow coverage at the next large multi-facility master leases that we have with Kindred. And those triple-net leases are designed to contemplate ups and downs in Medicare reimbursement over time. And ebbs and flows in the operator EBITDAR knowing that our rent should continue to be money good. And so we feel really good about that.

If you look forward I think to the bigger picture of healthcare reform, I do think it's too early to tell. But, as that, as healthcare reform if it gets passed and as the rules get refined, we would hope and expect that Kindred with its leadership position in the post acute world would be someone who would do well in that environment.

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. And then just last thing from me, there are a couple portfolios out there potentially being shopped-- skilled nursing and some others. How are you feeling about again kind of the world in general at this point, and are those things that you would consider we take a look at at the right price?

Raymond Lewis

Yes Jerry, it's Ray. The first half, there really wasn't a lot of -- particularly in the seniors housing and skilled nursing area, there wasn't a lot of activity in the marketplace. I think you're right. As you look out to the second half we are aware of, several portfolios that are getting teed up to come to market, we'll certainly look at everything. And if we can find a good risk adjusted return in there that's attractive, we would certainly consider making an investment. So --

Jerry Doctrow - Stifel, Nicolaus & Company

Okay. Thanks.

Debra Cafaro

Thank you, Jerry.

Operator

Your next question comes from the line of Karin Ford with KeyBanc. Please proceed.

Karin Ford - KeyBanc Capital Markets

Hi, good morning. Just a clarification on your comments on the Sunrise expenses. It sounds like because the expense improvement was across the board and you are only expecting a couple of the line items to sort of rebound in the second half of the year, that you are expecting a portion of the margin improvement to be recurring, but not all of it. Would that be accurate?

Debra Cafaro

Yes, I mean, yes.

Karin Ford - KeyBanc Capital Markets

Okay. A portion of your credit facility had gotten extended and renewed last quarter, but a portion of it still remains due in 2010. Is there any update on that piece that's coming due next year?

Debra Cafaro

Yes. We have 590 in revolving credit capacity that matures in mid-2012 and then 277 that matures in mid-2010. And we basically believe that the 600 million which matures in 2010 is more than adequate capacity for our needs. We tend to have our revolver usage at less than a third of the capacity over time. We still, that all said we still are in discussions with our lenders to see whether any of the ones who were not in a position to extend when we completed the extension in March, to see if they would now be in a position to extend. And we structured the facility to make that easy for them to do. So that's how we are approaching it for the time being.

Karin Ford - KeyBanc Capital Markets

Okay. That makes sense. Last question is just on the Sunrise Senior Living front. Is there any update from you guys on discussions with them on the strategic front in terms of changing the management contract or, the assets that you own in partnership with them on the capital front? Or are there any strategic changes on their side? I think I had read an article where they were discussing perhaps trying to price their product a little more affordably in this current economic environment. Is there any new changes on that front?

Debra Cafaro

Well, I think it's important to reiterate that as one of Sunrise's capital partners and they do own 20% interest in about 60 of the assets that they manage for us that we are open under the right terms, and at the right time to being a source of liquidity for them as they continue to resolve their corporate issues. And so there is some possibility that we could acquire this 20% interest from them. And we continue generally to try to work constructively with Sunrise to enhance the value of our assets. And this is our principal objective to drive NOI to the assets and to maximize the value of the assets.

Karin Ford - KeyBanc Capital Markets

Is there a current thought of perhaps reducing, you've been getting good rate increases but perhaps reducing the rate in order to try to boost occupancy? Or are you satisfied with the current operating plan at this time?

Raymond Lewis

Karin, it's Ray. I think Sunrise has been pretty disciplined about going through the portfolio, looking at the units that have been vacant for longer periods of time and applying discounts to any to those units. Those that continue to be in high demand have not been seeing discounts. In fact, about two-thirds of the new move-ins so far this year has been receiving some form of discount. But in general, it's been pretty limited and has been used to move units and drive occupancy primarily.

And so I think we continue to be a premium priced product. I would expect that to continue given the quality of the assets, the location that they're in, and the quality of service that Sunrise provides in there. And so we're hopeful that that will continue.

Karin Ford - KeyBanc Capital Markets

Thanks. That's helpful.

Debra Cafaro

Thank you, Karin.

Operator

Your next question comes from the line of Brian Sakino (ph) with Barclays Capital. Please proceed.

Unidentified Analyst

Good morning. Just wanted to get a couple of additional questions here on Sunrise. You guys provided some good details on the expense upside that you received. If you could also give us some updates in terms of how you know I guess that pricing and occupancy has progressed versus some of the guidance that you gave us coming into the year?

Raymond Lewis

Bryan, this is Ray. I mean I think if you look at the performance of the portfolio, occupancy has hovered around the 87% range for the second quarter, which is consistent with what we told you on the last call. We've seen some modest uptick heading into the third quarter, but consistent I think with prior quarter's performance. Rate has been up modestly this year. And annual rate increases have been offset somewhat by promotional pricing at the assets. And so, in general I think the performance on the top line has been relatively consistent with what we have been saying so far this year.

Unidentified Analyst

Okay. Great, thanks. And then with the MOBs that you guys moved into operations this quarter I guess, can you give us a little bit of perspective on how to think about the rate there versus your portfolio that won't be as currently operations?

Raymond Lewis

Well, so the asset that we moved into operations this year was the development asset in Greenville that I mentioned in my opening remarks. As I said, the asset was significantly free leased at 85% plus. Rates were consistent with we had underwritten and consistent with what we would expect for a A quality MOB on campus with an excellent health system.

Unidentified Analyst

Okay. Thanks a lot.

Debra Cafaro

You're welcome.

Operator

Your next question comes from the line of David Toti with Citi. Please proceed.

David Toti - Citigroup

Good morning everyone. Michael Bilerman is here with me as well.

Debra Cafaro

Hi guys.

David Toti - Citigroup

First question, with regard to skilled nursing I know you touched a little bit upon the government interaction in terms of program proposals, what's your view on your exposure in terms of portfolio to public versus private funding sources ? Are you still fairly comfortable with that ratio, or are you thinking that perhaps you might want more exposure to the public side?

Debra Cafaro

Well, if you look at the portfolio and I'll give you some statistics what we do is we annualize NOI for the quarter assuming that all the sales and acquisitions occurred at the beginning of the period. And if you look at our NOI portfolio, what you see is that skilled nursing is about 29% of our NOI and long-term acute care hospitals are about 15%. And I guess you're characterizing... and in each of those assets if you look through to the operations, some portion of the revenues are government reimbursed in the nursing homes, it would be Medicare and some Medicaid. And in the hospitals, it's almost all Medicare. But there's also a private pay managed care component in each of those asset types.

And we're comfortable with those levels of investments and those red levels. We have always thought it's important to have a balanced asset class and payer source in our portfolio. Because if you've seen just in the last three years, people loved private pay then they loved government reimbursed and so on and so forth. And we think it's our job to build a portfolio that delivers reliable cash flows and has counter cyclical risk in it.

David Toti - Citigroup

Great. And then, Ray you did touch upon MOBs as being probably the top of the list in terms of growth, external growth opportunities and interest. Where was skilled nursing facilities fall in that spectrum?

Raymond Lewis

As Debbie mentioned, we like our portfolio mix the way it stands right now. I think if you project it forward and we focused on medical office and building out that percentage by definition skilled nursing would probably shrink as a percentage of our total portfolio. That having been said, I think if we found some good, high-quality, newer skilled nursing assets with strong operators, we would be interested in deploying capital there.

David Toti - Citigroup

Great. And then just stepping back a bit from a macro perspective relative to senior housing, last quarter or the quarter, obviously a couple of quarters before that, there was a lot of discussion about pent-up demand and some of the need driven demand for senior housing being delayed because of the economic environment. Have you seen trends in the last couple of months that would suggest that some of that demand has been unlocked and is that one of the reasons for a slightly more positive outlook for the second half?

Debra Cafaro

Well, one thing as you didn't mention that we think is really important is that there is virtually no new supply coming online of assisted living products. And that I think makes, sets the stage really David for a strong snap back in performance as and when the economy does turn up, turns for the better. So I think that's an important piece of the puzzle.

We are happy that we've seen what we thought we were seeing when we spoke to you in May which is some stabilization in occupancy at around that 87% level. And we are in fact seeing that hold and in fact improve a little bit as we ended the quarter and came into July. And we'll have to continue to monitor it carefully to see whether that really takes hold and continues to rise. So, we're cautiously optimistic and we'll let you know more as soon as we know more.

David Toti - Citigroup

Debbie, it's Michael speaking. Just had a quick question, back at NAREIT, when we spoke, talked a little bit about being up, being able to be opportunistic given where the balance sheet is. Though you want to be very prudent in terms of how you put out capital, also in terms of size and that's, not to say there was a house limit but that a transaction if you're going to go out would probably max to be a 500 million. Has that changed at all in the past two months in terms of how you are thinking about capital deployment and sort of that first move that you're going to make in sort of putting cash out?

Debra Cafaro

Well, I think your characterization of us as a management team as being prudent and patient is really correct. We want to make sure that when we deploy capital, we do so carefully and we know at that point in time that we can replace the capital and we know what the cost of that capital is. So, I don't want to put a house limit on anything. But I do think you can expect us as we always have to proceed prudently and hopefully intelligently as we begin to deploy capital as hopefully we start coming out of the current economic and capital market downturn.

Michael Bilerman - Citigroup

And that's helpful. In your sense I think you talked about being able to tap every source of capital this year between bank, bonds, the agencies, the equity market asset sales and clearly having gotten favorable pricing at the time relative to market your perspective today given that we've seen continued narrowing of spreads across all of those markets and cost of capital. How do you think if you were to raise additional capital today, well I recognize the balance sheet is under levered or for the new realm where four times debt to EBITDA is the new norm, you're already there. But how do you think about if you have to raise additional capital from here that cost?

Debra Cafaro

Well, as we think about a blended cost to debt that's part bonds, part bank, which again the bank borrowing level is quite low it's probably under 3%. We've got the bond costs at let's call it 450 to 475 over, and we've got Freddie and Fannie between six and 7%. So you blend that all in there and it's a fairly attractive cost to debt I would say.

Michael Bilerman - Citigroup

And then your equity hurdle rate is probably higher today than it was in the past despite the cost of debt being low?

Debra Cafaro

Yes. Well, higher than 2007, lower than November 2008.

Michael Bilerman - Citigroup

Okay. Thank you.

Debra Cafaro

Thank you.

Operator

Your next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

Richard Anderson - BMO Capital Markets

Thanks for that. Good morning folks.

Debra Cafaro

Hi Rich.

Raymond Lewis

Hey Rich.

Richard Anderson - BMO Capital Markets

Good quarter. You know on the Sunrise topics for a moment, some of your peers are making an effort or at least mentioning the fact how they're not exposed to that situation. But you don't seem to be in that camp. But it seems like you're more inclined to work with them and have no imminent interest in trying to replace them. Is that a fair characterization?

Debra Cafaro

I think the way we think about it Rich is that we are razor focused on maximizing the value of the assets and maximizing the NOI of the assets. And for the moment that has led us to take a constructive approach and that's how I would characterize our thinking on the topic.

Richard Anderson - BMO Capital Markets

Okay. How much of the rise in Sunrise in terms of your outlook for the year, was driven by what we would, what might be natural seasonality factors in the second and third quarter. I mean this like seasonality issue kind of came through whereas in the first quarter you may not have been so sure that was going to come through, how much did seasonality play in the -- can you quantify that at all?

Debra Cafaro

Well, we're discounting the impact of seasonality since I do think that we are in the deepest and most prolonged recession of our lifetime. And so in some ways, we're in uncharted waters. And so we're really, we're discounting the seasonality impact and we are really just blocking and tackling in terms of what do we think revenues are going to look like, what do we think rates are going to look like, do we think occupancy is sort of stabilizing? Whereas perhaps in the beginning of the year, there was a lot less visibility on some of those topics.

Richard Anderson - BMO Capital Markets

Okay. To the topic of your leverage obviously as you describe it already there at four times debt to EBITDA. But let's say the acquisition markets starts to heat up and there's opportunities the REITs starts to play their roles, become more inquisitive you guys included. Where is your sort of range of comfort in using that metric debt to EBITDA, assuming four as the low end, how high are you willing or able to go, to start to execute externally?

Debra Cafaro

Well, I think we're comfortable where we are and as the environment changes we would make our conclusion about what our balance sheet should look like in that environment.

Richard Anderson - BMO Capital Markets

Rating agencies have a sealing on that number I assume?

Debra Cafaro

We have always been the most important governors on the way we handle our balance sheet and I think we've done a really good job at that. And so, that's where we care what the rating agency thinks, rating agency thinking we're committed to moving up the credit curve. But really I think, we make the critical judgments and we're responsible for making the critical judgments about what we want our balance sheet to look like in different capital markets and economic environments.

Richard Anderson - BMO Capital Markets

Okay. On the Kindred transaction, obviously that's a nice win for you and I know you kind of call it a win for them too as far as it, necessarily you see it that way, but I kind of get it eliminating underperforming assets. But who approached who on that transaction? Can you kind of walk us through that?

Debra Cafaro

Yes, I mean it really is a collaborative transaction and I think it does create value for both sets of shareholders. The good answer to your specific question is that we're working with Kindred sort of all the time, and so it really was and mutual conversation.

Richard Anderson - BMO Capital Markets

Okay. And do you see more pockets of opportunity like that in the future?

Debra Cafaro

Well, I can only talk to history. We've done this four or five times in the past and it's worked well for both companies. And over time there's always interest in culling the portfolio, improving it and creating situations that view, that are good for both companies. So over time I would expect, given the past I would hope and expect that there may be more opportunities to do things like this.

Richard Anderson - BMO Capital Markets

And then last question, quick one; what is your unencumbered assets today?

Debra Cafaro

The pool?

Richard Anderson - BMO Capital Markets

Yes.

Debra Cafaro

I'll have to get back to you, I know we have about 1.5 billion of senior housing that's unencumbered. And all of Kindred's unencumbered, we have a huge unencumbered pool but we'll have to get back to about the specifics on that.

Richard Anderson - BMO Capital Markets

Okay, great. Thank you.

Debra Cafaro

Thank you.

Operator

Your next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed

Jim Sullivan - Green Street Advisors

Thanks. With respective to Sunrise, it sounds like your less pessimistic outlook for the rest of '09 is based not on top line but on the expense side, is that fair?

Raymond Lewis

Jim, this is Ray. I think in general what we've tried to do is assume that the top line remains relatively stable through the balance of the year and then, look at different margin outcomes based on the last couple of quarters of performance. So yeah, I mean I think you're right, I think we're looking at expenses as being the primarily determinant of where we'll end up in our range through the balance of the year.

Jim Sullivan - Green Street Advisors

And with respect to the expenses the -- in your same-store pool the expenses dropped 5% sequentially, I think you're attributing that to seasonality, is that correct?

Raymond Lewis

Well, there is a component of seasonality in the expenses with respect to utilities and repairs and maintenance which as I mentioned in my opening comments, tend to be just naturally loaded towards the back half of the year. We did see, as I also said sort of expense reductions across the board which may or may not continue into the second half.

Jim Sullivan - Green Street Advisors

I guess where I get confused on the expenses is, looking at the year-over-year comparison in Q2 '08, you had 72 properties in your same-store pool and the expenses were about 67 million. Now you have 78 properties in that pool and the expenses were 67.7. Trying to figure out how you added six properties without meaningfully increasing the absolute amount of expense.

Debra Cafaro

I'm trying to understand the question. Last year we had a $4 million credit to expenses. And so that -- I don't know if that answers your question, or frankly goes the other way. I think --

Jim Sullivan - Green Street Advisors

You reported 63 million, you add back the four, that gets you to 67 million on a 72 property pool.

Debra Cafaro

Yes

Jim Sullivan - Green Street Advisors

Q '09 you're reporting expenses of 67.7 almost the same number, but the size of the pool increased to 78 properties from 72 previously.

Debra Cafaro

I'm not sure that you're reading that right, because we have same-store comparisons in terms of 74 and 78. So I think we'd be back to take the question offline so we can walk through it with you in detail.

Jim Sullivan - Green Street Advisors

Yeah. You actually did a disclosure in 3Q '08 particularly, that's where were pulling the numbers. I'm just trying to figure out how you add six properties, but don't incur any material increase in expense. I understand the seasonality looking sequentially, looking forward. But I'm trying to compare year-over-year.

Debra Cafaro

We do compare year-over-year sort of for you there. So let's do it offline.

Jim Sullivan - Green Street Advisors

Okay. And then staying with Sunrise. I'm trying to figure out how your partner's share of the NOI is determined, when I look at same store 2Q '09 versus 2Q '08, total NOI decreases 12.5%, yet your partner's share of NOI actually increases by 4%. Why would that happen?

Debra Cafaro

Well, we do share NOI carries them to at the assets. And we own some assets 100% and some between 75 and 85%. And so, it could be the mix.

Jim Sullivan - Green Street Advisors

I'm not sure I follow that. I'm trying to figure out for the portfolio, there's a substantial decrease in NOI, but the partner share of NOI actually increases.

Debra Cafaro

The only other thing I can think of is that we book in our portion franchise taxes and things that are outside of operations that bill only to us. So again, I think this will be a technical point, we'll be happy to walk through with you after the call.

Jim Sullivan - Green Street Advisors

So, Ventas's share of NOI which dropped 15%, is that a better sort of decrease to think about for the overall '09 performance?

Raymond Lewis

Yeah, I think if you look at the second quarter and the first quarter of '09, and you take the company's or the partner share as a percentage of the total it hovers around that 15% which seems to be about the right level looking over time.

Jim Sullivan - Green Street Advisors

Okay. Thank you.

Debra Cafaro

You're welcome.

Operator

At this time I show no further questions, and would like to turn the call over to Debra Cafaro for any closing remarks.

Debra Cafaro

All right. Well, we are happy to report a good quarter to you, and to increase our guidance. And we'll continue through the balance of the year to work very hard to create value for all of you. So thank you for joining and we look forward to seeing you soon.

Operator

This concludes the presentation you may all now disconnect. Good day.

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