Ventas, Inc. (VTR) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: Ventas Inc. (VTR)

Ventas, Inc. (NYSE:VTR)

Q2 2013 Earnings Call

July 26, 2013 10:00 am ET

Executives

Lori B. Wittman - Senior Vice President of Capital Markets and Investor Relations

Debra A. Cafaro - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Investment Committee

Raymond J. Lewis - President

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

Analysts

Juan Sanabria - BofA Merrill Lynch, Research Division

Emmanuel Korchman

Jack Meehan - Barclays Capital, Research Division

Jeff Theiler - Green Street Advisors, Inc., Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Nicholas Yulico - UBS Investment Bank, Research Division

Michael Carroll - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Ventas Earnings Conference Call. My name is Jillian and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Lori Wittman, Senior Vice President of Capital Markets and Investor Relations. Please proceed, ma'am.

Lori B. Wittman

Thank you. 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, 2013.

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 federal securities laws. These projections, predictions and statements are based on the 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, 2012 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 the quantitative reconciliation 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 and CEO of the company.

Debra A. Cafaro

Good morning, everyone. I want to welcome all of our shareholders and other participants, and thank you for joining Ventas' Second Quarter 2013 Earnings Call. It's great to be able to share our strong second quarter results and increased guidance with you.

After my brief overview, Ray Lewis will discuss our portfolio performance and Rich Schweinhart will review our financial results in detail. Following our remarks, we'll be pleased to answer your questions.

We all know that the second quarter showed significant capital markets volatility, catalyzed by said commentary in late May. We positioned ourselves well ahead of the market changes by creating significant liquidity to fund current and near-term capital needs. This quarter, we continued to focus on enterprise growth, with financial strength, we delivered excellent results and we executed our strategy.

Let me touch on some of the quarter's highlights and accomplishments. Normalized FFO for the quarter was $1.01 per share. Our results represented 9% per-share growth compared to the second quarter of last year excluding non-cash items. Drivers of performance were same-store portfolio growth of 3%, accretive investments and new developments. In the quarter, we generated cash flow from operations at an annual rate of $1.1 billion, compared to our annual dividends to shareholders of less than $800 million. Our significant free cash flow is one of the company's most valuable attributes because it provides great flexibility for future external growth, reinvesting in our assets, reduction in debt and/or increases in our dividend.

We were very proactive early in the year and raised $840 million of attractively-priced debt and equity capital, as we discussed in our last call with you. As a reminder, we issued $760 million of 15-year fixed rate debt with a 3.6% blended interest rate. Unlike our usual matched-funding approach, we essentially pre-funded our midyear capital uses. These actions were forward-thinking and value creating. However, they did result in temporary quarterly dilution exceeding $0.02 compared to the first quarter, as we mentioned then.

We also continued to successfully execute our capital recycling and risk management plan. Since beginning of April, we have sold assets and received loan repayments totaling $160 million. Due to our timely capital raising and recycling, we finished the quarter with excellent liquidity of $1.7 billion available under our revolver. Our credit metrics also remained fantastic, at 29% debt to enterprise value at quarter end.

As the second quarter closed and the third begin, we started putting our capital to work. Our investment activity since the beginning of Q2 exceeded $400 million and we have a like amount under contract currently. Virtually all of our investments are in high quality, senior housing or medical office buildings with expected unlevered yields averaging 6.5%.

Another highlight of the quarter was the successful completion of our 2013 renewal process for 89 licensed healthcare assets that were up for renewal in May. As we projected, all transactions and transitions were completed by July 1, achieving an excellent result of greater tenant diversification at the same NOI level. We welcome our new tenant operators and look forward to their success.

I also want to recognize our asset management and legal groups for their outstanding effort and results. Great execution is a hallmark of Ventas' sustained excellence.

As a result of all of our activities, we are really happy to increase our full year normalized FFO guidance to $4.06 to $4.10 per share. The midpoint of our guidance range is increasing $0.05 mostly because of acquisitions and expected portfolio performance in the second half. If we achieve the midpoint of $4.08 per share, it would represent 10% growth in full year normalized FFO per share excluding non-cash items. Including those items, our reported growth would range from 7% to 8% per share.

Although our increased full year guidance does not include additional investments beyond the $400 million currently under contract, our investment pipeline remained strong with deals large and small in various stages of activity. While we can never predict the timing or volume of investments within a specific time frame, we remain highly confident about our external growth opportunities.

In sum, we've built a balanced company that can deliver results in a multitude of economic, reimbursement and capital markets environments. With our skilled team focused, our portfolio performing and our external growth in refinancing activities adding value, we are on track to achieve the consistent, superior results and sustain the excellence you have come to expect from us.

Ray?

Raymond J. Lewis

Thank you, Debbie. With that acquisitions completed so far this year, our diverse and balanced portfolio now stands at 1,439 seniors housing, medical office and post-acute properties in 47 states and 2 Canadian provinces. This productive portfolio turned in another strong quarter with 3% year-over-year same-store cash NOI growth.

Today, I want to briefly run through some of the second quarter portfolio highlights starting with our seniors housing operating, or shop, portfolio. Once again, this portfolio of 227 best-in-class seniors housing assets turned in another strong performance in the quarter, delivering $110 million of NOI, which represents 14.4% growth versus the prior year. Occupancy in the total portfolio finished the quarter at a strong 90.9%, which compares favorably to the NIC MAP second quarter 2013 average seniors housing occupancy of 89%. Year-over-year, occupancy in the second quarter for the 196 properties in the same-store portfolio increased 160 basis points. REVPOR increased 3.7% and NOI increased 6.9%. Sequentially, on the 220 same-store properties, REVPOR increased 70 basis points and NOI increased 1.5%.

Our non-stabilized portfolio consisted of 3 properties in the second quarter of 2013 versus 13 properties in the second quarter of 2012, as a number of our redevelopment projects have been completed, leased out and moved to the stable portfolio. For the 10 projects that we have since moved from the lease up to stable, year-over-year NOI growth was 33% driven by an 890 basis point increase in occupancy, a 3% increase in REVPOR and a 500 basis point increase in margin. As you can see, our redevelopment projects provide exceptional growth and attractive risk adjusted returns. The 7 projects we've approved and completed since our ownership have delivered an average annual NOI growth rate of 15% and an average unlevered yield on cost of about 11% at this point in their stabilization. So far this year, we have approved another 7 redevelopment projects, totaling nearly $75 million of investment, and have an active pipeline of over $200 million of additional opportunities that are under evaluation. So, our shop portfolio continues to deliver strong performance in line with our expectations.

Next, I'll turn to the performance of our triple-net lease portfolio, which is diversified across 855 seniors housing, skilled nursing and hospital assets. As a reminder, these long-term net lease properties produced steady cash flow with escalations, the majority of which are tied to CPI. Same-store cash NOI in the second quarter was up 1.3% year-over-year. Cash flow coverage in the 831 properties in our same-store triple-net lease portfolio for the first quarter of 2013, the latest available information was strong at 1.6x and remained stable. Likewise, coverage in our 143 same-store Kindred assets remained strong at 2x while quality mix in our Kindred portfolio improved from 73% to 77%, sequentially. As Debbie mentioned in her remarks, we are extremely pleased to have fully completed the renewal, releasing and transition on the 89 properties that were up for renewal in 2013 with Kindred. Of the 89 properties, 35 were renewed with Kindred. The 50 properties that we leased to new operators are now fully transitioned and the operators are performing well, and we completed the sale of 4 non-strategic assets. Through this process, we proved that our assets are valuable in the market and that we can successfully execute our complicated, multiparty releasing project.

Finally, I'd like to provide a few comments on our medical office business. At the end of the second quarter, our consolidated MOB portfolio consisted of 302 properties spanning over 16 million square feet and accounting for approximately 17% of our annualized NOI. These high-quality assets of which 94% are on campuses or affiliated with highly rated health systems continued their strong performance in the second quarter. Through the first half of this year, cash NOI growth for the 254 same-store properties was a solid 2.6%. Year-over-year, same-store cash NOI growth for the quarter was 1.4% due primarily to the timing of expenses in recoveries.

Total MOB portfolio NOI grew to $72.5 million in the second quarter, up from $59.5 million in the second quarter of 2012 due primarily to acquisitions. Occupancy across the entire consolidated portfolio increased 30 basis points year-over-year to 90.6% in the second quarter, again due primarily to the high-quality acquisitions completed last year. We also continued to make good progress with our lease-up assets. Occupancy in our lease-up portfolio increased by 310 basis points over the second quarter of 2012. In addition, occupancy for the 13 properties in the lease-up portfolio in the second quarter of both 2012 and 2013 increased 380 basis points.

With that, I'll turn the call over to Rick Schweinhart, who will discuss our financial results. Rick?

Richard A. Schweinhart

Thank you, Ray. First, a recap of second quarter cash flows. Cash flows from operations were $277 million, up 29% from the second quarter last year. Dividends were $197 million, producing a net of $80 million available to invest. In the second quarter, we had approximately $378 million in real estate investments.

In addition to the cash flow, we raised $758 million in debt capital in the first quarter, which paid down our revolver resulting in ample liquidity for the investments. We also received proceeds of $90 million from asset dispositions, loan syndications and loan repayments. We issued 1 million shares raising $77 million under our at-the-market program in addition to the $5 million raised in the first quarter. We assumed $69 million of 3.8% debt as part of the acquisitions. With all of the sources of funds, we only borrowed approximately $45 million on our revolver net of debt repayments.

During the quarter and subsequent quarter end, we paid down $163 million of secured debt. Our revolver balance at quarter end was $260 million. We currently have unrestricted cash of $56 million and almost $1.7 billion in borrowing capacity available on our revolver.

Now let me focus on second quarter results. Second quarter 2013 normalized FFO was $1.01 per diluted share, an increase of 6.3% compared to the second quarter of 2012 per share results of $0.95. Normalized FFO increased 7% to $298 million compared to last year's second quarter of $278 million. Second quarter 2013 normalized FFO increased from last year's second quarter due to our last 4 quarters' investments of over $1.8 billion. NOI increases in all 3 of our segments, lower weighted average interest rates offset somewhat by higher debt balances from our acquisition activity increases in net cash balances during the quarter, resulting from capital raises, asset sales and receipt of loan repayments. Average cash interest rate improved 50 basis points to 4.1% at June 30, 2013 compared to June 30, 2012.

Weighted average shares outstanding for the second quarter were 295 million shares up less than 1% compared to the second quarter of 2012. At June 30, our credit stats remained outstanding with net debt to pro forma EBITDA of 5.3x. Our fixed charge coverage ratio in excess of 4x. Secured debt to enterprise value of 10%. And debt to enterprise value at 29%. On April 2, S&P raised our outlook to positive on our BBB rating.

We are increasing our 2013 normalized FFO per diluted share guidance to $4.06 to $4.10 from $3.99 to $4.07. The midpoint increase is to $4.08 from $4.03. The midpoint results and growth of 7.4% and normalized FFO per share. We have included the impact of closed acquisitions and approximately $400 million in additional acquisitions that are currently under contract. The guidance does not include the impact of additional capital transactions or unannounced acquisitions.

Operator, if you would, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Juan Sanabria, Bank of America.

Juan Sanabria - BofA Merrill Lynch, Research Division

It's Juan Sanabria here. Just a quick question with regards to your acquisition pipeline. Could you just give us a bit more color on sort of how it appears relative to -- for -- the fed Chairman kind of spooked the market and cap rates kind of shot up, and what do you think is sort of low-hanging fruit with some partners that you have out there that you think you can maybe transact on over the course of time?

Debra A. Cafaro

I think our pipeline continues to be very strong and we're seeing a good volume of different kinds of transactions across the spectrum of assets and that really has not changed, given the fed's commentary. And so that's very positive, and I think as Ray mentioned, we have some great development, redevelopment opportunities with our existing operating partners, and we are continuing to see some deal flow from the 100-plus tenant/operators that we have in our portfolio. And then of course, we're seeing a lot of investment opportunities really from third parties in the market.

Juan Sanabria - BofA Merrill Lynch, Research Division

Great. And just a -- I guess, some modeling type question, when should we model the second quarter acquisitions closed, were they more towards the second -- towards the end of the second quarter, and with regards to the 400...

Debra A. Cafaro

With the second -- yes, the second quarter was towards the end and in the ones under contract will be for the end of the third.

Operator

Your next question comes from the line of Emmanuel Korchman, Citi.

Emmanuel Korchman

Just -- if we look at your -- the press release, there, Debbie, you guys mentioned that 7 of the senior housings communities were transferred to Atria. I was wondering if you could give us some details there, maybe give us some insight as to how we should look at deals going forward, and is that something we should expect that maybe Atria becomes a consolidator, and you find deals and you kind of put them into that platform?

Debra A. Cafaro

That's a great question. So of our acquisitions in the second quarter, upon closing of the high-quality senior housing assets that are all private pay and in Atria's footprint, we have been transitioning operations of those assets to Atria at the closing. And as we talked about before, Atria is one of the premier senior living providers in the United States with the ability to scale and a really great platform. And so we believe they will continue to grow and will be one of the potential consolidators in the industry.

Raymond J. Lewis

Yes, I mean, where we can find the assets that's still our strategy of being the best assets in the best markets. The opportunity to put those in with Atria is one of the values of our relationship with them. So we really want to capitalize on that.

Emmanuel Korchman

And maybe just in terms of mechanics, is that the type of scenario where you go out, you find the asset, and you say, this will be great under Atria or are they out there finding stuff and saying, hey, Ventas, if this works, our relationship...

Debra A. Cafaro

It's both. We are going out and finding acquisition opportunities that we think would be a value added for Ventas. And where we think Atria would be a great operator and they of course, have their own network that would identify opportunities as well.

Emmanuel Korchman

Perfect. And then maybe switching to the redevelopment comments that you made earlier. When we look at your pipeline, it's kind of, you got this $151 million of approved deals in the release, $240 million of total, sort of, development projects out there, how should we think about the yields and sort of the capital committed to those annual returns?

Raymond J. Lewis

Yes, so as you know, the redevelopment pipeline targets assets in our portfolio where we can add additional value by adding programming such as memory care or upgrading the facilities to drive rate. And so far, with the projects that we've completed and that have stabilized, we're achieving the 11% returns that I referenced in the opening comments. I would say the pipeline is very consistent with the projects that we've done, historically. And so we would hope that they would achieve similar types of returns as we implement and stabilize those.

Emmanuel Korchman

Great. And then final one for me, as we look at your pipeline, whether it be the $400 million or outside of that going forward, should we assume that they're all going to be senior housing and MOB or is there chances outside of that spectrum?

Debra A. Cafaro

In the acquisitions under contract right now, they're straight down the fairway consistent with our strategy kind of private pay high-quality senior housing and MOBs. But in the pipeline, generally, it would be across the spectrum of healthcare and senior housing assets.

Operator

Your next question comes from the line of Jack Meehan, Barclays.

Jack Meehan - Barclays Capital, Research Division

I was hoping to get a little more color on the Kindred disclosures. Could you remind us what the right way to think about the management fee to get from EBITDARM to EBITDAR? Is it still 40 to 50 bps?

Debra A. Cafaro

In general, it -- again, it depends on -- that's an imputed number and so we produce kind of the cash flow number, which is the EBITDARM number. And as you look at repositioning of portfolio or transitioning it, what you really have to think about is, what is the incremental or marginal cost of a provider to take on those assets. So that maybe as low as 1% or 2%. If you want to use a 5% or 4% management fee, that would get you your 40 to 50 basis points.

Richard A. Schweinhart

And there's another dimension to that as well whether it's a nursing home or a hospital, obviously, the hospitals have much higher revenues and lower percentage overhead.

Jack Meehan - Barclays Capital, Research Division

Okay, got you, that makes sense. And then just one other on the disclosures, what else is embedded in the Kindred EBITDAR that you report. Is this just the true EBITDAR you generate from the leased facilities that Kindred has with Ventas, after you back out RehabCare, is there anything else?

Debra A. Cafaro

Everything is transparent on that. So it's basically, the EBITDARM and the therapy as indicated.

Jack Meehan - Barclays Capital, Research Division

Okay, got you. So would that include things like home health as well?

Debra A. Cafaro

No.

Jack Meehan - Barclays Capital, Research Division

Okay, and then just one other, on the guidance for the RIDEA portfolio, so -- first half of the year, NOI was around $218 million so that imply similar contribution in the second half even though you're showing really good year-over-year trends. So what are some of the factors leading you to maintain guidance at this time? Is it the redevelopment with Atria or is it something else?

Richard A. Schweinhart

No, I think if you look at the guidance that we've provided of $430 million to $440 million there were some very basic assumptions built into it that we talked about when we announced the guidance. And so at that time, we said average occupancy would be up about 200 basis points across the year. Average rate would be up around 3% and the average margin would be up about 30 basis points. And through the first half, we've tracked that pretty closely and so we would expect that, that will continue through the second half and we're very comfortable with the guidance range that we've provided on the base portfolio.

Jack Meehan - Barclays Capital, Research Division

Okay. And then the average occupancy in the same-store portfolio is down 10 bps, sequentially, is there any way to get a read on maybe a point in time estimate how you left the second quarter relative to where you entered it?

Richard A. Schweinhart

So yes, the decline in occupancy in the portfolio of 10 basis points is consistent with historical seasonal patterns and also what we saw in the broader NIC industry data. So what typically happens is occupancy declines through the first quarter due to the flu season and coming out of the holidays and kind of runs -- reaches its bottom around the April, early May time frame and starts to grow, heading into the third quarter. And we've seen that pattern repeat in our portfolio this year. Last year we bucked the trend a little bit, and we talked about that in the second quarter of last year but this year we're following normal seasonal patterns.

Operator

Your next question comes from the line of Jeff Theiler, Green Street Advisors.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Looking at the latest industry data from NIC, it seems like there's a pretty significant increase in construction starts, which fits all the anecdotal evidence that, at least, I've been hearing about increasing development in the senior housing. Is this something you're seeing? Are you worried about this at all and how do you project your longer-term NOI growth for your senior housing operating portfolio clear over the next 2 to 3 years?

Debra A. Cafaro

Thanks so much for asking us.

Raymond J. Lewis

So yes, Jeff, I mean, it is something, obviously, that we watch as NIC announced their data. I'd make a couple of comments. One is I think the NIC data is informative, but it lacks texture, in that it really talked about absolute units under construction, and it's really important to put those into perspective by market as a percentage of the inventory and also consider what the occupancy in those markets are and what the growth rate of the seniors population and adult child population target market is within those MSAs. But sort of setting that aside, we've gone back obviously, looked at our portfolio to understand what's going on in each of our markets and as a general statement, our assets are in highly varied entry infill locations within their markets. When you look at our portfolio about a 1/4 of our NOI comes from the New York, I'm not talking about the shop portfolio, about a 1/4 of our NOI comes from New York Metropolitan statistical area where construction as a percentage of inventory is about 2.3%. So very modest construction. And then when we look at the rest of our portfolio, there's no other MSA that accounts for more than 5% of our total portfolio NOI. So we're very diversified across the markets. But as we look forward on the growth, I would say it's pretty consistent in that 4% to 5% range long-term growth rates, and near term, we see a pretty consistent with what we've been reporting.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Okay. So you think at least 25% of your portfolio is relatively protected versus the rest of the industry?

Debra A. Cafaro

Well, more than that, I would say, but just -- again, the New York Metropolitan area was probably about a 1/4 and construction area is very low as a percentage of inventory. I think that was really the point, there are other markets where we feel very protected because of the infill locations, barrier to entry and the cost to entitle and construct. So we do think we have a really high-quality portfolio that has some good characteristics. And I would also just summarize by saying that occupancy in senior housing is expected to continue to rise into 2014 because of the growth in the seniors population among other things, but absorption -- net absorption is expected to continue to be positive.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Okay. Just a quick clarification on one of Ray's earlier comments. Ray, I think you said you have another $2 million of redevelopment projects under consideration, is that in addition to the $240.4 million that we see in the supplemental, or is that encompassed in there?

Raymond J. Lewis

That's in addition to. We're constantly looking at our portfolio to identify opportunities, and one of the benefits of having over 1,400 properties is that there's a lot of good opportunities like that in the portfolio.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Got it. And how big do you think you'd be comfortable with the redevelopment program, what size is kind of your max, would you say?

Raymond J. Lewis

We're not really targeting a maximum amount or a minimum amount. I mean, I think our goal is to try to find the projects that generate the attractive returns and to phase them in and have a consistent flow of transactions. That's not so, Jeff, you shouldn't look at our $200 million pipeline and say we'll do all $200 million of that. Will pick the ones that we think make the most sense and then we'll probably find some others in our portfolio over time that will add to the pipeline.

Operator

Your next question comes from the line of Daniel Bernstein, Stifel.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

On the development side, and I'm thinking about your investments here, you've increase the number of redevelopments you have, increased the number of development, just generally it looks like in the portfolio, is there an investment drift a little bit away from acquisitions to development aside from anything that's happening on the capital cost side, just from where cap rates have gone in the last few years in seniors housing and MOBs and other asset classes, are you looking at little bit more development now for growth versus acquisitions?

Debra A. Cafaro

I would say that our strategy has been very consistent, and that -- in that we have really been able to create a lot of value for shareholders by investing over the past couple of years in highly accretive, high-quality assets and we expect that we can continue to do that and will. I would say that as far as the redevelopment and development pipeline that, as we've grown, as Ray said, we have more assets that create good risk-adjusted return opportunities, and that pipeline was getting smaller as we had completed projects and brought them online and so now, we're sort of just refilling that pipeline. And it should, as he said, be sort of a consistent part of our business. So I would say, again, very consistent and we should be able to deploy capital in those investments as well as in redevelopment as part of our capital deployment strategy to create value.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And on the Atria assets that were -- I guess the assets that were moved to the Atria operating platform this quarter or second quarter, are those part of the redevelopment projects that you're looking at or those already stabilized in a good shape, were they -- okay.

Debra A. Cafaro

No. No, those are all 90-plus percent occupied type assets in some locations and they're kind of plug-and-play.

Raymond J. Lewis

Yes, so those are over 93% occupied, Dan, and stabilized.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

It's somewhat kind of unit mix price point?

Debra A. Cafaro

Yes.

Raymond J. Lewis

Yes.

Debra A. Cafaro

Yes, AOIO.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

And then, just also on the portfolio pipeline generally, you alluded to -- it's still a robust pipeline out there cross asset classes, but have you seen any change in cap rates, any change in the motivations of sellers near here, are they pushing portfolios a little bit faster than you -- into the market, worried that cap rates are going to move back up, or are you delaying any acquisitions at this point, waiting to see where capital cost will move?

Debra A. Cafaro

I would say that the deal flow, as we've said, has been very significant and very consistent. I would say that across real estate, generally, there hasn't been a significant movement in cap rates since the interest rates have been rising. I would say that if there is more of a move over time, you would expect cap rates to adjust accordingly. So the spread in the -- between cap rates and the risk-free rate has narrowed a little bit in real estate generally. But that's narrowing from kind of all-time highs that we saw in '11. So I think it's a pretty normal environment and one in which we feel confident we can continue to make money for investors.

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Does that narrow of a spread imply that -- will you take any additional balance sheet risk in terms of like running out to credit line over the longer moving from 10-year debt back to 5-year debt just to temporarily maintain the spread that you're looking for, or is that just not something you would consider at this point?

Debra A. Cafaro

Well, I think we've been, again, very consistent about our balance sheet strategy. I think we have been able to grow FFO per share at 10% compounded rates for a long period of time. And we've been able to do that with really strong balance sheet, lot of financial strength and flexibility. And so we would expect to, obviously, react to external conditions but we will maintain good financial strength and flexibility. So we can do both.

Operator

Your next question comes from the line of Rich Anderson, BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

Ray, did you say -- this question is for Ray, I think, did you mention that in New York, the construction as a percentage of inventory per shop is -- for senior housing is 2.5% and that's low?

Raymond J. Lewis

Yes, it's about 2.3%. I think in total, there's about 570 units under construction in the New York MSA.

Richard C. Anderson - BMO Capital Markets U.S.

Okay, because 2.5%, 2.3% doesn't seem low to me, I guess, a little bit different in the senior housing space because that would be more like delivery in number and negative property type so, would you agree with that?

Raymond J. Lewis

Well, I only can speak to the seniors housing space, Rich, and we're very comfortable with that level of construction.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Second question, have you looked at how the composition of your shareholder base has changed since May 22?

Debra A. Cafaro

Of course, we have limited ability to get good data that until the end of the quarter, 45 days really after the end of the quarter.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Next topic, on the 2015 Kindred expiration, can you talk about maybe any lessons that you might have learned in the first go-around that you will apply this time around, or you were happy with how it went and you maybe were just mimic it, word for word this next go-around.

Debra A. Cafaro

Good question.

Raymond J. Lewis

So I will say we're happy with how it went. We transitioned all the assets at the same rent levels. So we -- through that process developed a playbook that will serve as a guide for this releasing process. Every single one of these things is going to be different, obviously, but we learned a lot in the last go-around and one of the things, I think, Rich, that we learned is it's really important to get in front of the regulators as quickly as possible. There are things in the process that are outside your control, so speed, focus and getting in front of the third parties is a critical success factor. And so we'll build on what we learned in the last go-around and we've got a good playbook for the 2015.

Richard C. Anderson - BMO Capital Markets U.S.

Okay, great. And then my last question is on guidance. It's become a little bit more normal for you to include unfinished acquisitions in your guidance. You did that again this quarter. I'm curious, do you feel like the path for Ventas to increase guidance now will be more externally growth driven that is stuff using -- including stuff that has not been completed that has typically been your way to kind of have a -- kind of have unvarnished guidance without unfinished acquisitions. But now that maybe the occupancy gain is winding down and your senior housing that you want to include non-completed acquisitions in the guidance, is that kind of the motivation, or just curious why that change in your guidance.

Debra A. Cafaro

Yes, I mean, we've talked about that before and I think it's quite contrary to your hypothesis. I would tell you that the reason that we're doing it is, typically, when we've already raised the capital to do something, which we prefunded as I mentioned we raised to 7 60 in debt at 3.6% in the first quarter for 15 years, it becomes mathematically misleading almost to say, well, we've kind of raised the money and we're going to let it sit there because it artificially -- as you saw this quarter, it temporarily and artificially kind of diminishes earnings. So that seems like it doesn't do justice to the investors to put in one side of it and kind of not the other side of it when we have good visibility to the other side of it. And so it's not an expectation that the acquisitions are under contract. So it really is, we prefunded some things, we have the capital, when you really look at giving people some real visibility into our expectations, that seems to be the best way to do it. We do feel good about portfolio performance as well, which is as I mentioned, another reason to increase the guidance.

Operator

Your next question comes from the line of Tayo Okusanya, Jefferies.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Sorry to beat a dead horse but with regards to the acquisitions, you kind of talked about -- you've talked about the broad breadth of things you're looking at. Could you also talk about deal size in regards to the mainly smaller deals from your regional operators. Is that where a lot of this potential transaction activity could come from or are there, again, some other [indiscernible] of transactions.

Debra A. Cafaro

Yes, I mean, if you look at kind of vertically and horizontally, I would say that the deal size varies from a single asset to kind of very, very large and the asset types if you go across are more multiple asset types in senior housing and healthcare. So continues to be a very wide spectrum.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Okay. I mean, are you surprised, Debbie, that since January or so, I mean, there have been a couple of really big deals people have been talking about but none of them are really closed. Has that surprised you?

Debra A. Cafaro

I would repeat what we always say, which is that it is absolutely impossible to predict, with any kind of accuracy, the timing or volume of investments. Everything is in its own due time for a whole host of different reasons and so no, I'm not -- I think it's very consistent with what we think.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Okay, that's helpful. Second question, could you give us a sense what you're generally hearing about Medicaid rates for the skilled nursing portfolio, and kind of what's happening on that end?

Debra A. Cafaro

Yes, I mean, we typically predict kind of a plus or minus 1% to 2% in any given year. We are hearing that some states are having some significant increases, actually, although in general, we tend to keep it -- our projections for Medicaid, as I said, in the plus or minus 1% to 2% range on average, as you look across all the different states.

Omotayo T. Okusanya - Jefferies LLC, Research Division

But have you heard from any state so far where maybe a little bit more negative than you were anticipating?

Debra A. Cafaro

No, I wouldn't say that.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Okay, that's helpful. And then the last thing from my end is just -- the medical office building portfolio, when I just kind of take a look at some of the same-store data, I do see my same-store NOI did come down sequentially as well as year-over-year. Could you just talk a little bit about that specific lease from year-over-year occupancy loss, what may have happened?

Richard A. Schweinhart

Yes, so Tayo, I think the -- on the year-over-year occupancy laws, those are just forecasted and budgeted move-outs. It's really sort of a timing of when leases will move back in or new leases will move back in. And same thing, I think, with the results. I think you really -- with the medical office in the timing of expenses and the recoveries, you're going to get some variability between the quarters. I think that's just what you saw between the first and the second quarter and that's, quite frankly, why I wanted to make sure people understood in my comments in the first half that same-store cash NOI was up 2.6% but in the quarter, it was at 1.4%, so you can get a sense for some of that variability.

Omotayo T. Okusanya - Jefferies LLC, Research Division

That's really helpful. And then what about the mark-to-market or rents from the MOB portfolio, what's that looking like right now?

Richard A. Schweinhart

It's positive. We are seeing positive net leasing spreads in the market.

Omotayo T. Okusanya - Jefferies LLC, Research Division

And low single digits, like 2%, 3%? Or higher?

Richard A. Schweinhart

Yes, low single-digit is fair.

Operator

Your next question comes from the line of Karin Ford, KeyBanc Capital Markets.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Do you guys expect any more loan repayments or dispositions for the balance of the year, and if so, are they factored into guidance?

Debra A. Cafaro

We're -- not a material amount but if we do expect them, they are factored in.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Okay. And my second question just relates to your appetite for hospitals. I know we talked a little bit about that on the last call and then, since then, a proxy came from Vanguard Health Systems said that a couple of health care REITs had made bids on that company, which is relatively sizable, so like, could you just talk about Ventas' appetite for hospital investment of that size, is that still something that you guys would consider?

Debra A. Cafaro

Yes, we did talk about hospitals last quarter, and I mentioned that over time, big picture long-term secular trends. We really do believe that real estate assets will flow to the most efficient owners. And that you are seeing a lot of consolidation in change in the hospital business and that, that may create opportunities to commit capital. I would say that we are very well- positioned with Todd's business. He has been serving high-quality healthcare systems for 25 years and we have a lot of expertise within the firm that we would consider a capital allocation to the hospital business with the right partner, right pricing and structure. And it may never come to pass, but it is a sector that I think is large and interesting as you look at health care and health care reform going forward.

Operator

Your next question comes from the line of Nick Yulico, UBS.

Nicholas Yulico - UBS Investment Bank, Research Division

I just had a question, a couple of questions, first on senior housing, the operating guidance for the year. I mean, you guys are now at the midpoint, essentially, it seems like you're running year-to-date the midpoint of that guidance, you've -- the occupancy is down and then of the second quarter versus where it ended last year. So what I'm wondering is, is at this point is there really any chance of making the low end of that guidance since you guys seem to be pretty positive on how you're thinking about occupancy going into next year?

Debra A. Cafaro

Ray is going to answer, but I would say that again we provided a range 4 30 to 4 40 where we're right on track with our expectations and we do believe the portfolio isn't and will continue to perform well.

Raymond J. Lewis

I mean, yes, pretty much what Debbie said, I think the only other thing I would add to that is that as I mentioned we've seen occupancy follow normal historical seasonal patterns and trending upwards heading into the third quarter. So...

Debra A. Cafaro

I mean, expenses do go up in the third and fourth quarter.

Raymond J. Lewis

Absolutely.

Debra A. Cafaro

But as we talked about before, so that is a factor.

Raymond J. Lewis

Yes, I mean, expenses will pick up in the third and fourth quarter. Third quarter is particularly heavy on utilities because of the air-conditioning and also vacations in the third.

Debra A. Cafaro

Not ours.

Raymond J. Lewis

Not ours, unfortunately, but so, yes, I think that's right, look, we're comfortable with what we've provided in guidance so...

Nicholas Yulico - UBS Investment Bank, Research Division

Okay, so it's not, I mean, it's not just an occupancy issue so even if I were to assume, say, that your occupancy could get back to where it ended last year for that portfolio there may be some expense to offset on that?

Raymond J. Lewis

Yes, I think that's right. Again, as I said, all of the projections or assumptions that we based our guidance projections on are tracking right in line with our performance through the first half of the year.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay, great. And then just lastly, on the FFO guidance for the year, is there anything that is dilutive in there in the back half of the year, say, like an unsecured bond raise to take down the line of credit or, I mean, is there any sort of pool factor that versus what you guys have done in the first half here?

Debra A. Cafaro

Yes, the line of credit is down in the $200 million to $300 million range. We haven't factored, as Rick said, any capital raises into our second half guidance, there were sales in at the end of the second quarter that our dilutive relative to the second half, the $160 million that we mentioned and then we have, of course, factored that into account.

Operator

Your next question comes from the line of Michael Carroll, RBC Capital Markets.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Within your senior housing portfolio, is there a meaningful difference between the performance of the Class A assets and the Class B assets?

Debra A. Cafaro

Well, within senior housing, again, the distinction that we would make is that in our senior housing operating portfolio with Atria and Sunrise, we are seeing high-single digits growth rate pretty consistently, and those are the best assets in the best markets. And so that has really been a market-leading portfolio, I would say, consistently outperforming industry statistics. And so that high-end of performance really has continued.

Raymond J. Lewis

Yes, and Michael, just to add on to that, I think where we have the assets in our triple-net lease portfolio, the growth rate has been less but the performance has been very stable.

Debra A. Cafaro

And as expected.

Raymond J. Lewis

And as expected. So I think it's fair to say that our seniors housing operating assets grow at a better rate by virtue of the quality of the buildings.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay and then within, I guess, the triple net portfolio, it sounds like the senior housing portfolio is a little sheltered from new development activity. Are you see more development activity that could compete against your triple net portfolio?

Raymond J. Lewis

No, not particularly. Just to remind everybody, I mean, the triple net portfolios are typically full of multi-facility master leases that will have additional structural on credit support through guarantees of security deposits, et cetera. When we look at the construction across the country, we have a highly diversified portfolio there. We don't really see any major flashpoints in construction against our triple net portfolio. There are some smaller markets out there where you would look at it and say, wow, there is 20% construction as a percentage of inventory and then when you actually dig into the numbers, you realize that it's one building that's being built and there's just not a lot of inventory in the market. Occupancy is 90%. So I think it's really important to again do the analysis that gets a little more texture around the construction data.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay. And then coverage ratio and the skilled nursing facility portfolio declined again modestly, I guess, from the fourth quarter to the first quarter. Is that ratio stabilized now and can we expect to see any improvements, or is it going to stay around that range?

Debra A. Cafaro

I think you can expect it to be around that range at least in the near term as, again, health care reform a lot of the post-acute really comes from hospitals and so you have to look at hospital volumes and you also have to look at the fact that the providers are increasingly shortening length of stay and so that has an industry-wide effect on occupancy level. So I think you should expect it around here.

Raymond J. Lewis

One other thing within our portfolio is, we dropped off the first quarter at '12 from our trailing '12 statistics, which was probably Kindred's best quarter of recent memory. So...

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay. And then my last question relates to the acquisitions that are under contract and completed. Can you break out the percentage between that of senior housing, medical office building and possibly loans that you may have made?

Debra A. Cafaro

Okay. It's -- they're all equity investments and I would say that other than maybe $100 million, it's private pay senior housing.

Operator

You have no questions at this time. I would now like to turn the call over to Debra Cafaro for closing remarks.

Debra A. Cafaro

Thank you, Jillian, and I want to thank everyone for joining us this morning. As always, we really appreciate your interest in the company and your support of Ventas. We hope everybody have a great rest of the summer and look forward to seeing you again soon. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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