Ventas, Inc. Q2 2010 Earnings Call Transcript

Jul.29.10 | About: Ventas Inc. (VTR)

Ventas, Inc. (NYSE:VTR)

Q2 2010 Earnings Conference Call

July 29, 2010 09:00 am ET

Executives

David Smith - IR

Debra Cafaro - Chairman, President and CEO

Ray Lewis - EVP and CIO

Rick Schweinhart - EVP and CFO

Analysts

Michael Bilerman - Citi

Jeff Spector - Bank of America/Merrill Lynch

Jerry Doctrow - Stifel Nicolaus

Karin Ford - Keybanc

Ross Nussbaum - UBS

Todd Stender - Wells Fargo Securities

Rob Mains - Morgan Keegan

Tayo Okusanya - Jefferies and Company

Operator

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

I would now like to turn the presentation over to David Smith. Please proceed.

David 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, 2010.

As we start, let me express that all projections and predictions and certain other statements to be made during this conference call maybe considered forward looking statements within the meaning of the 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 to stockholders and others should recognize that actual results may differ materially from the company's expectations and 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, 2009, 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 and 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 Cafaro

Thanks, David. Good morning to all of our shareholders and participants and welcome to the Ventas 2010 second quarter earnings call. Today the Ventas management team is with me in our Chicago office and we are very pleased to be joined by Todd Lillibridge, our newest colleague.

We have a lot of excellent news to cover today, including positive earnings, increased normalized FFO per share guidance, the closing of the Lillibridge acquisition, good results from our operating portfolio of seniors housing and a constructive and active investment outlook.

Ventas is delivering on its promise of preserving and creating value for its stakeholders through consistent reliable cash flow growth from a diversified portfolio of productive, healthcare and senior housing assets. We continue to enhance our growth through strategic and accretive acquisitions, while also maintaining a strong and flexible balance sheet.

After an overview of results and a discussion of our acquisition of Lillibridge, Ray Lewis will discuss our asset performance and investment strategy and Rick Schweinhart will report on our financial results in detail. After our prepared remarks, we'll be happy to answer your questions.

Let's begin with the exciting acquisition of Lillibridge Healthcare Services which closed earlier this month. In one fell swoop, we acquired an interest in 96 medical office buildings. We are now the national leader in the large and growing medical office building sector. Through our wholly owned subsidiary, Lillibridge Healthcare Services, we own and/or manage a 153 medical office and outpatient assets containing $8.6 million square feet located in 20 states.

The combination of Ventas' strong balance sheet and access to capital with Lillibridge's experienced, relationship and integrated capabilities should provide attractive real estate solutions for hospital clients and drive value in our firm.

The acquired MOBs have a very desirable profile. They are 92% on campus; all affiliated with single A and double A rated hospitals and health systems. 86% occupied and located in 17 states. The 92 stabilized MOBs in which we acquired an ownership interest are over 87% occupied and the 34 wholly owned stabilized MOBs we purchased are 94% occupied.

There is a compelling thesis for investing in the large and growing MOB arena that I'd like to recap today.

First, its $175 billion highly fragmented market. Hospitals remain the largest owners of the asset class which is expected to grow 30% in the next 10 years. We should see increased utilization as the 79 million baby (inaudible) become Medicare eligible starting in 2011, and grow at three times the rate of the overall population.

Healthcare reform should also increase demand as roughly 32 million uninsured individuals gain access to the healthcare system. Importantly, healthcare reform will also drive patient care to the lowest cost most clinically appropriate setting which in many cases is an outpatient site.

Hospital capital needs should incent hospital owners of MOBs to sell their real estate to more efficient owners like Ventas in order to fund operations and higher yielding capital projects. And finally, well located on campus MOBs tend to deliver long term stable cash flow.

Moving from the strategic to the specific let me describe the financial terms of our Lillibridge transaction. Our acquisition price for Lillibridge was $381 million in total. The purchase price represents approximately 15 times expected second half 2010 normalized EBITDA of (inaudible) as an integrated real estate owner and services business. This is in line with and at the low end of the EBITDA multiples of the publicly traded integrated MOB company.

We funded the acquisition with cash on hand, a draw on our revolver and the assumption of $125 million of mortgage debt.

We estimate that the $381 million purchase price will be allocated approximately 93% to the real estate and 7% to the platform businesses, subject to final allocation valuation.

The real estate purchase price equates to a per square foot value of between $150 and $160.

With cash NOI for the second half of 2010 for Ventas' portion of the MOBs, estimated to be between $13.5 million and $14 million. The cap rate on the real estate NOI should range between 7.6% and 7.9%.

Recall that we acquired a 100% interest in 38 MOBs, a 20% interest in 24 MOBs and a 5% interest in 34 MOBs, as well as a 100% interest in (inaudible) brand, client relationships and integrated platform of property management, leasing, construction and development, advisory and asset management services. The allocated estimated purchase price for the platform businesses represents about a 2.5 types multiple on Lillibridge's estimated second half annualized revenues from the service businesses.

Our investment in this excellent business platform should enable us to grow the MOB business in a scalable way by giving us the internalized capabilities, relationships and scale we need.

We're also very excited to have Todd Lillibridge and his team leading our combined MOB and outpatient business under the nationally recognized (inaudible) brand. Their 20 plus years principally serving highly rated healthcare systems and hospitals have been characterized by high integrity, strong relationships with clients and an excellent track record.

We welcome Todd and our new Lillibridge colleagues to Ventas. We are confident that all the pieces are in place for the Lillibridge acquisition to create significant additional value for Ventas stakeholders by further diversifying our portfolio, delivering reliable cash flows, and providing new avenues for growth. We will do everything we can to execute this transaction effectively so we can deliver those results.

Turning to the highlights of our quarter. First we are very pleased to report strong normalized FFO per share of $0.71, an increase of 4.4%, compared to last year. Increased 2010 normalized FFO guidance, that if achieved would represent year-over-year per share growth of 2.6 to 4.5%.

This quarter, we enjoyed year-over-year cash flow from operations growth of over 6%.

Our seniors housing operating portfolio also exhibited positive NOI and occupancy trends. Our total portfolio of high quality and productive senior housing and healthcare assets achieved year-over-year same store NOI growth of 5.4%.

And we ended the quarter with an incredibly strong balance sheet that positions us to continue to grow and diversify.

Before I turn the call over to Ray, I'd like to make one comment on the Medicare rate increases expected for both skilled nursing facilities and long term acute care hospitals. In both asset classes, Medicare reimbursement is slated to increase for fiscal year 2011 which begins October 1, 2010. Ray?

Ray Lewis

Thanks, Debby. With the closing of the Lillibridge's acquisition, Ventas' portfolio of high quality healthcare and seniors housing assets now totals approximately 600 properties located in 44 states and two Canadian provinces and is even more diversified by tenant, operator, payer source, and asset class.

First, I will review the performance of our triple net lease portfolio. Approximately 73% of our NOI comes from our pooled multi facility master leases with credit and structural support and contractual growth escalations.

Once again, this part of our portfolio provided consistent and growing cash flows to Ventas during the quarter as it generated a 2.6% year-over-year increase in same store cash NOI. This strong performance was driven by among other things our annual Kindred rent escalations that occurred on May 1. NOI from Kindred now approximates 38% of total portfolio NOI and equals about $249 million annually.

Our triple-net lease portfolio continues to track our guidance that we stated at the beginning of the year when we projected same store cash growth of over 2.5% for 2010. Occupancies in our triple-net senior housing and hospital properties trended positively during the first quarter, the latest date reported on both a year-over-year and sequential basis. Occupancy in our skilled nursing portfolio remains stable at a nearly 90% level.

Cash flow coverage across our triple-net portfolio decreased slightly from 1.8 times to 1.7 times. You will recall that our triple-net leases are designed to anticipate ebbs and flows and operator cash flows based on changes in their operating results or reimbursement and are mostly in large pooled multi-facility master leases which provide structural protection to Ventas cash flows.

Ventas remains very well covered and secure. Moreover, the majority of these rent payments come from and are guaranteed by large, publicly traded operators that are leaders in their industry such as (inaudible), the largest post acute provider and Brookdale, the largest senior living provider. So the take away for our triple-net portfolio is that we continue to be pleased with the growing and reliable cash flows these assets provide Ventas year after year.

Now I'd like to turn to the performance of our operating portfolio. During the second quarter our operating portfolio included 79 high-end matching style assisted living communities managed by Sunrise Senior Living and 26 medical office buildings managed by third parties. This portfolio accounted for 25% of our NOI during the quarter. As I'll discuss, this part of our portfolio continues to perform well and deliver improving results.

First, let me address our portfolio of need driven seniors housing communities managed by Sunrise, which accounted for 20% of our portfolio NOI during the second quarter. We acquired this portfolio in April of 2007 and in reviewing the historical trends, occupancy in the second quarter has always been lower than in the first quarter.

However this year, the portfolio outperformed that trend as our stable portfolio achieved average occupancy of 88.4%, which was flat with the first quarter levels and 120 basis points higher than the second quarter of last year. Moreover, we finished the quarter with a spot occupancy rate of over 89% on our stable properties.

Total portfolio NOI for the quarter was $38.8 million. These results include a $3 million cash payment from Sunrise for expense overruns. Excluding this payment our portfolio delivered a 6% increase in NOI sequentially driven primarily by an extra day in the quarter and lower expenses.

Again, excluding the $3 million cash payment, margins for the 78 stabilized communities increased 140 basis points to 32.8% compared to the first quarter of this year. Year-over-year NOI for the portfolio also excluding the $3 million payment from Sunrise grew to 5.9% during the quarter driven by increases in rate and occupancy.

We have one lease up asset in the portfolio which is the high end 229 unit independent living community in Toronto known as Steals. This newly built property continues to fill with occupancy up 150 basis points sequentially and up 1,870 basis points year-over-year to 86.6% in the quarter. NOI, occupancy and margin all continue to trend well versus prior periods.

The operating trends in the portfolio continue to improve across the board. As a result of the year-to-date performance, we are increasing our NOI guidance for the Sunrise portfolio to $139 million to $145 million compared to our prior guidance of $128 million to $138 million.

For the balance of the year, we expect consistent performance for the first half. At the mid point of this range, this would equate to an impressive 8.4% year-over-year growth in NOI compared to the $131 million in 2009.

Now let's turn to medical office. Our medical office building portfolio which comprised 1.7 million square feet during the second quarter also did well with occupancy stable and margin improving on a sequential and year-over-year basis.

Our stabilized pool of 22 assets generated $6.5 million of NOI to Ventas which implies a gap yield of roughly 8.5% on average on Ventas' investment. Year-over-year, our same-store stabilized pool of 19 assets, occupancy remains strong at 93.5% and margin improved. We also have four assets that remain in our lease up portfolio totaling 330,000 square feet which continue to perform well.

Occupancy in the second quarter for these four assets was 81.6%, an increase of 820 basis points compared to the first quarter's 73.4% occupancy. NOI and margin also continued to exhibit positive trends during the quarter, as current signed leases take occupancy, we expect continued improvement in this portfolio.

So we continue to be pleased with the performance of our MOB portfolio, including the Lillibridge assets, MOB NOI will now comprise 8% of Ventas' annualized NOI and total $8.6 million square feet. We look forward to providing you with the operating performance of that portfolio during our next earnings call.

Let me turn for a moment to the acquisitions environment. We were pleased to close the Lillibridge transaction earlier this quarter. This transformative transaction puts the Ventas squarely on the medical office map with 153 medical office buildings owned or managed in 20 states, 45 cities, and 65 markets nationwide.

Moreover, with the addition of our new Lillibridge colleagues, we now have the integrated management, leasing and development platform that we have so long aspired to. With the Lillibridge acquisition we have closed over $400 million of new investments in 2010, but we are not done.

We continue to work on a number of interesting opportunities in each of our core asset types and while the market remains competitive for high quality cash flowing healthcare real estate we are well positioned to compete because of our low leverage relationships, track record, experience and excellent access to low cost capital.

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

Rick Schweinhart

Thank you, Ray. The highlights of the second quarter are that operating income was up from last year's second quarter and also increased compared to the first quarter. Second quarter 2010 normalized FFO was $0.71 per diluted share, an increase of 4.4% compared to the second quarter of 2009 on 2% more shares outstanding.

Additionally, we continue to focus on maintaining a strong balance sheet and increasing cash flow from operations.

At June 30th our cash balance was $28 million and we had $126 million outstanding on our revolving credit facility. Our credit stats remain excellent with net debt to pro forma EBITDA at four times and our fixed charge coverage ratio in excess of three times. Our June 30th, 2010 debt to enterprise value is 26%. Our cash flow from operations for the quarter ended June 30th, 2010 increased to $92 million from $82 million for the comparable quarter last year, up 12%.

On July 1st, we acquired Lillibridge Healthcare Services and currently have approximately $35 million of cash and $345 million outstanding on our revolving credit facility.

During the quarter we had five items of note. First, in June, we opportunistically redeemed $142.7 million of our 7% and 1/8% senior notes due 2015. We used the call option in our bonds and paid 103.6 of par. The economic return of this investment was 7%. We recorded a $6.4 million of loss on extinguishment of debt. We also repaid $52 million of maturing mortgage debt.

Second. Also in June, we acquired from Sunrise its minority interest in two of our Sunrise managed properties for $9.9 million. This represented a cap rate of over 9% on NOI.

Third. We sold four assets not current tenant for $22.5 million and achieved a $5 million gain on sale. Fourth. Normalized FFO includes $3 million cash payment from Sunrise for expense overrides. And fifth. Merger related expenses and deal costs total $4.2 million in quarter, mostly due to our July 1 acquisition of Lillibridge.

Details of the second quarter earnings are as follows:

Normalized FFO was $111.9 million or $0.71 per diluted share. Normalized FFO includes the previously mentioned $3 million cash payment from Sunrise and excludes $5.6 million net expense consisting of loss on the early extinguishment of debt, merger related expenses and deal costs offset by gains on the sale of properties and an income tax benefit.

Second quarter normalized FFO increased from last years second quarter due to NOI increases in all three of our portfolios, triple-net, Sunrise managed and medical office buildings.

Triple-net leases grew to $118 million from $116.3 million, primarily due to contractual escalations. Sunrise managed NOI increased 15% to $38.8 million this quarter from $33.9 million last year. Second quarter 2010 NOI includes the Sunrise $3 million, cash payment as a reduction of expenses.

Excluding the $3 million, Sunrise managed NOI increased 5.9%. In comparison first quarter was $33.8 million. Also, second quarter year-over-year our medical office building NOI grew to $8.1 million from $5.3 million primarily due to acquisitions. Second quarter results do not include any results from our July 1st acquisition of Lillibridge.

Interest expense was flat at $44 million compared to last year and slightly better than the first quarter. G&A and stock based compensation was fairly flat with last year and slightly down from the first quarter. Weighted average shares outstanding in the quarter at $157.4 million, increased 2% over second quarter of last year and remain fairly flat versus $157.0 million in the first. Second quarter normalized FAD per diluted share increased to $0.69 compared to $0.66 in the second quarter last year and $0.65 from the first quarter.

We are increasing our 2010 normalized FFO per diluted share guidance to $2.75 to $2.80 from $2.69 to $2.75. This reflects a positive trend in our Sunrise portfolio, our debt retirements and our Lillibridge acquisition. This positive trend is indicative of the growing and reliable cash flows that are diversified, high quality and productive portfolio of healthcare and senior housing continues to provide.

Our key assumptions for our 2010 normalized FFO per share guidance are that total Sunrise NOI for our 79 assets ranges from $139 million to $145 million, up from $128 million to $138 million. Corporate G&A expenses ranges between $41 million and $43 million. You will recall that our original guidance assumed we would invest all of our cash, approximately $150 million mid year which we have now accomplished. Our guidance does not include other material acquisitions or divestiture activity, deal cost, capital transactions, or litigation expenses or proceeds.

Operator if you would please open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Michael Bilerman with Citi. Please proceed.

Michael Bilerman - Citi

Quentin (inaudible) is here with me as well. Appreciate the detail on the Lillibridge pricing. Maybe you can spend some time and the difference between the EBITDA yield and effective sort of your NOI yield would imply, let's call it about $13 million of some level of service expenses or corporate G&A of the Lillibridge Enterprise, just sort of backing into the EBITDA relative to the revenues that you've laid out. And I'm just curious as you think about that $13 million, how much of that is real service expenses that get tied to the service revenues versus how much is really corporate?

Debra Cafaro

Okay. So we're going to be looking at the Lillibridge business as an integrated whole and then in pieces. So as we promised, we wanted to be a lot more transparent about what the valuation metrics were and so we're glad to provide this additional information. So if you look at the integrated P&L as we had talked about, it's about 15.5 of EBITDA so you've got obviously your NOI and we've given you kind of a range on that of 27 to 28 and then you'll basically have 10ish in service revenues and approximately 15ish in expenses, and those aren't really broken out by individual service lines so we're generally thinking of that as one integrated P&L statement, and that's how the street really looks at the integrated businesses like HR and Cogdell Spencer.

Michael Bilerman - Citi

So I'm just thinking about you're running Ventas an efficient organization of $40 million of G&A, $15 million for $400 million purchase price seems like a lot and I understand that it's a much more service-oriented business and there's a lot more integrated into it. I'm just trying to get a clearer sense of how much of that supports the call it $11 million of service revenues versus just management?

Debra Cafaro

Well, I mean its right, but again it's a sort of unified whole because we obviously we're acquiring over 200 individuals. Our take on this transaction and why we're so excited about it is it does enable us to get these internal capabilities, development, property management, which as is very labor intensive and people intensive and to have a scalable platform that we can grow and be able to do so in an accretive way.

If I were you I would just again sort of look at the business as an integrated P&L and certainly what we are expecting is that this will allow us to grow without adding additional overhead, so it's a very kind of scalable platform and then also overtime, we would expect to kind of gain additional efficiencies, as we get both businesses to run as one company.

So you won't see as we break out the MOB segment particular breakdowns of the expenses as between sort of the advisory business or the property management business or so on, because we are looking at it as that integrated whole.

Michael Bilerman - Citi

So will you be reporting the property, this $11 million of service that won't be a separate line item with associated expenses to it? You'll just take the $15 million added to your G&A, and then you'll have service revenue line item of 11 million?

Debra Cafaro

Essentially, yes, so we will likely have an MOB segment as we go forward which would combine both, our MOBs, as well as the Lillibridge MOBs and service businesses, in one unified whole.

Michael Bilerman - Citi

Well I guess I mean the scalability of it, I mean if you think about in three years out, how much potentially could drop to the bottom line in terms of efficiency then?

Debra Cafaro

Well, again, I think if we can really grow this business and make acquisitions and do developments, it's both for fee and on balance sheet, we are going to capture a lot more earnings within Ventas, both because we'll have higher yielding on balance sheet developments, because we'll be capturing all the profit internally, we'll also presumably have fee business and then, we won't be adding overhead. So, I would expect overtime that the again the unified P&L, will the service business loss effectively will shrink or the NOI and revenues will increase and in either case the bottom line will improve.

Michael Bilerman - Citi

And just the last question just relating, to the expense recapture, what exactly triggered that? How did it become uncovered? What sort of period is it covering?

Debra Cafaro

Okay and you're switching to Sunrise?

Michael Bilerman - Citi

Yes.

Debra Cafaro

We have contracts with Sunrise that have some significant benefits in them. Among those benefits are expense controls and we have received from time to time if Sunrise exceeds those expense controls cash payments from them for those overruns and we've received those in the past. This payment was for '08, a combination of '08 and '09.

Operator

Your next question comes from the line of Jeff Spector with Bank of America/Merrill Lynch. Please proceed.

Jeff Spector - Bank of America/Merrill Lynch

You mentioned that I guess expectations for MOB over the next years, it should grow 30 plus percent, I think you said in the next 10 years. Can you just talk about, sorry?

Debra Cafaro

The asset type, yes.

Jeff Spector - Bank of America/Merrill Lynch

That asset type, so I guess can you just talk about that a little bit more, that analysis, how or whatever company came up with that is deriving that and the evidence I guess of even though there's an increase in Medicaid patients and so forth that that will definitely mean there will be a need for more MOBs?

Debra Cafaro

Well, these are industries. This is that the MOB asset class is expected to grow sort of outpatient is expected to grow 30% and that's really the source of it is SG2 consulting which is a well known healthcare consulting firm and that's for example, compared to inpatient which may shrink actually during the same period and it goes to this theme of the positive sort of macro trends where you want to drive patience to the lowest cost most clinically appropriate setting which is potentially these outpatient areas, so that's where the data comes from. Does that answer your question?

Jeff Spector - Bank of America/Merrill Lynch

And maybe switching over to assisted living, independent living. The housing market remains rocky. Your operating portfolio continues to improve. I know that Nick reported stronger trends for assisted living versus IL. How do you explain, I guess, the dynamics of what's going on here because I know a lot of folks really look at the housing market as a critical sign post of turning point for those businesses?

Ray Lewis

So our portfolio is, our operating portfolio of Sunrise assets are high quality need driven assisted living product as contrasted the lower acuity independent living product which is more correlated to the housing market. Basically the residents that live in our buildings don't really have any alternative to stay in their homes any longer. They need the services that our buildings provide and they are not capable of living independently in their home.

So while they have the ability to potentially delay the decision for a few months, they can't postpone it indefinitely and that's why I think you're seeing both in the industry and then within our portfolio that assisted living and Alzheimer have held up extremely well even through the depths of the downturn.

Operator

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

Jerry Doctrow - Stifel Nicolaus

Let's see, a couple things. So you bought out a couple of the Sunrise minority interest. I guess I was a little curious as to what prompted you to buy two, whether you think this rate is indicative of others you might do, whether there's more of that stuff potentially in the acquisition pipeline?

Ray Lewis

That transaction occurred pursuant to a maturity of debt on two of the assets and it just seemed to make the most sense for both companies for us to pay off the debt in exchange for receiving the minority interest. We got a cap rate of nine plus percent that for those minority interests seemed appropriate and then the company Sunrise was able to preserve capital for other uses, so it seemed to be the right transaction for both companies at the time.

With respect to additional transactions and what those might look like, as we've said in the past, we're in constant discussions with sunrise. We're talking about different ways that we might be able to work together including acquisition of additional minority interest and so those types of discussions continue.

Jerry Doctrow - Stifel Nicolaus

And do you have more debt maturing this year, next year on the portfolio?

Debra Cafaro

I think there is three additional assets that would be this year.

Jerry Doctrow - Stifel Nicolaus

Okay and just one other request on that portfolio. It would be great if we can get numbers adjusted for the currency exchanges because it's hard then to sort out kind of what the real like rate changes and that sort of stuff EX the currency I think Sunrise provides it that way when they finally report, but it would just be helpful to do that because the currency helped a little bit it may hurt in the future, just be good to get it both ways.

Just one or two things more, if I could. Do you have any sense on the schedule for the HCP appeal? Your not being at attorney

Debra Cafaro

We do. The briefing, as you'll recall, we have $102 million judgment in the Federal Court in Kentucky and HCT has posted a bond in that amount in our favor. HCP has appealed the verdict against it and we have cross-appealed as well to achieve potentially higher damages. The matter has been fully briefed and the briefing is complete and an oral argument will be scheduled by the court some time presumably in the fourth quarter or first quarter and then a decision will be rendered thereafter.

Jerry Doctrow - Stifel Nicolaus

And then the last thing I just wonder if we can get anymore color on acquisitions. I mean think I Ray you made sort of a general statement you'd be investing in all property types. There's a number of things out there, obviously you've been doing a lot in MOBs. You've got a TRS. There's somewhat more talk about TRS structures. There is some strategic portfolios coming. Any place where you see priorities or any color to what's driving deals would be helpful?

Ray Lewis

Sure. Clearly, as we've said so far in our comments and questions and answers, we are - I'm very focused on continuing to grow our medical office building business. We've talked about the premise for that and with the Lillibridge acquisition we certainly now have the additional resources relationships and access to opportunities that will, I think, turbo charge that activity.

I think, the other areas that we're very interested you made reference to a couple of them, Jerry, seniors housing we continue to like the supply demand fundamentals in that marketplace as well as the forward-looking demographics. There are a number of opportunities to pursue in that space and we're excited about working on those. The TRS structure, I think, is appropriate for the seniors housing space. If you believe where we are in the cycle as being a good entry point, then you'd be willing to use the TRS. We certainly have additional capacity to do that so we would be interested in those types of transactions.

With respect to skilled nursing, as you point out, there are a number of companies that have either near term liquidity needs or private equity or other recapitalization requirements that could present opportunities for us. We are comfortable with and understand the space and that's another area where we would deploy capital. So as I said in my opening remarks, we're pleased to get the Lillibridge transaction done. We're not done with acquisitions for the year. We're working on a lot of things and we'll continue to make progress.

Operator

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

Karin Ford - Keybanc

Wanted to see if we could breakdown the guidance increase components? It looked like you raised the Sunrise NOI $0.06 a share. You said Lillibridge was going to be slightly accretive this year. It looks like you had some debt savings on the redemption and you raised the mid-point about $0.55. Are those numbers right or are there other components driving it as well?

Debra Cafaro

Yes, we can talk to you about it, the way we looked at it is sort of first half to second half, and I'll let Rick take that.

Rick Schweinhart

Okay, I think if you look at from the first half if you kind of start off with where we are, take off the $3 million or $0.02 and then kind of double that and add your $0.02 back. I think what we're seeing is about $0.02 due to Lillibridge, maybe $0.02 due to the bond pay off and everything else kind of netting out. So I think that's kind of generally the way it comes down.

Debra Cafaro

Very high level, but…

Karin Ford - Keybanc

Okay, fair enough. A question on Lillibridge. Can you talk about the leasing prospects and where you hope to get the occupancy up from 87% today? Can you also talk about what the potential development pipeline is in the portfolio?

Debra Cafaro

Yes, we can. In terms of leasing, as I mentioned the wholly owned assets, the 34 stabilized or about 94% occupied, the full stabilized is about as you pointed out 87ish and we are actually working with Todd and the team to develop a very aggressive and targeted program to increase NOI and leasing so we're hopeful that we can have some internal growth as well as acquisition growth from the portfolio and I think we'll be, there are some leasing prospects currently and I think we'll have more details for you when we sit down in the third quarter.

Karin Ford - Keybanc

Okay and then just finally I guess following up on Michael's question on sort of G&A from Lillibridge going forward, it looks like you raised your G&A guidance about $2 million at the mid point. If you annualize that it's about a $4 million annual run rate. Is that the right addition of G&A from Lillibridge?

Debra Cafaro

Well, the G&A guidance increased really at Ventas Corporate. And all of the impacts of increases to G&A at Lillibridge are embedded in those services in that integrated sort of 15 times EBITDA number that I gave you, so that's basically, its all of the Lillibridge expenses including any expenses from the $10 million, the amortization of the $10 million retention stock award that was granted to key employees to promote retention and alignment as well as new employment contracts for the CEO and the CFO of the business, that's all embedded in the Lillibridge numbers that we gave you as opposed to Ventas Corporate.

Operator

Your next question comes from the line of Dustin Pizzo of UBS. Please proceed.

Ross Nussbaum - UBS

Hi, it's Ross Nussbaum here with Dustin. On Lillibridge, just to be clear the yields and multiples in the press release are those based off of the $381 million purchase price?

Debra Cafaro

Well, the EBITDA multiple is but in terms of the cap rate and the services businesses there we have a preliminary allocation of the 381 which is subject to allocation from evaluation exercise, that 93% would be real estate and 7% would be services and so the cap rate is based on let's call it 354. Real Estate value give or take and the 2.5 times revenues is based on the revenues and the sort of 25, 27ish million value for the Lillibridge platform businesses if you want to call it that the brand, the relationship, all of that.

Ross Nussbaum - UBS

Right so they don't, but it doesn't include the 10 million stock grant and the 4 million or so of deal expenses?

Debra Cafaro

The purchase price does not but the P&L numbers that we provided to you do include and we're not, they do include the stock award. The amortization of stock award and the employment relationships, the new employment relationships that we have with the CEO and the CFO and the MOB business.

Ross Nussbaum - UBS

So part of that $10 million would be in the second half run rate on the expense side is what you're saying?

Debra Cafaro

Absolutely. Yes.

Ross Nussbaum - UBS

Got it, okay. Second question. You had made some commentary on the plus side on Medicare. I don't know if I missed it, but I didn't hear anything on the Medicaid side because that outlook seems materially worse than the Medicare outlook and I'm just curious what your commentary there is with respect to the potential Medicaid cuts that are coming whether it's in the next year, the next three years out of the states?

Debra Cafaro

Well, I'm happy you asked that actually. So the Medicare rates are projected to go up for sniff and Elpacks as you mentioned. If you look at a business like Kindred for example, the Elpack business is only less than 10% Medicaid. It's almost all Medicare and Managed Care. And if you look at the sniff business for Kindred, they have about 58% Medicare and a private pay and the revenues and the balance is Medicaid.

We actually do believe that Medicaid will increase, and again in healthcare, when people talk about cuts a lot of times they're talking about reductions in the rate of growth, not necessarily cuts, and it's our own internal expectation that Medicaid on the whole portfolio at skilled nursing will actually be positive and we believe and it's not certain, but we believe Congress will extend the SMAP assistance to the State, which in turn supports in many cases the Medicaid program. So we do think Medicaid will be in the positive range. We do think the Medicare story is positive as you mentioned. So we really feel good about the triple net Kindred business.

Ross Nussbaum - UBS

So when states like Kansas cut the Medicaid reimbursements by 10%, do you think that's more of an anomaly?

Debra Cafaro

I do, and again you have to be really careful about what this all really is when people talk about headlines versus what it really is when it comes down to the bottom-line and we don't have any nursing homes in Kansas, so I can't comment on that. So we'll be happy to talk to you about it. But overall, we still believe reimbursement across the board is going to be positive more so on the Medicare side.

Ross Nussbaum - UBS

Got it. Well while we're on the Sniffs there was a lot of attention I guess in the last few months from the legal ruling out in California against skilled healthcare Group and I'm just curious from your perspective, do you think that we're going to see this wave of ambulance chasing going after every skilled nursing owner in the country as a result of that. And how do you as the owner of the facility as opposed to the Operator feel about your potential legal responsibilities?

Debra Cafaro

Okay, I'll take those. I feel very confident to answer both those questions. As a REIT, again remember, we are the super senior secured piece of paper in the tenant's capital structure, okay. And then, so that is we believe the best way to invest in healthcare assets has been a great secure way to invest for our shareholders and so we feel good about that. Legally, we cannot have input into the operations of the assets. And for a whole variety of reasons including that, we cannot be liable in relation to the operations at the assets, so that's important number one.

Number two, part of what we are supposed to be doing and I believe we do is try to do business with leading operators in their states. Now remember Kindred is a leading post acute provider in the United States. They have sophistication, scale, and the resources to be compliant with regulations.

We only have six nursing homes in California. I should point that out. And Kindred is very rigorous about following staffing requirements, what was at issue in the matter that the skilled healthcare matter. And we monitor that compliance, but they are really the first line of defense and they monitor that very rigorously. So that's where we are on that subject.

Ross Nussbaum - UBS

Okay, last question. On the Sunrise front, Mark and Greg have been pretty clear that they need some equity or some recapitalization of the company. It would make sense that Ventas would be involved in that in some sense and I'm just wondering if the acquisition of the minority interest that you just did this quarter was a little bit of a precursor to a larger involvement of Ventas with Sunrise at the corporate level.

Debra Cafaro

Like the little training wheel deal. Well, look. As Ray said we're talking to Sunrise all the time about a variety of ways that we can potentially engage in mutually beneficial transactions. And we've both openly talked about the possibility of acquiring minority interest. There are still, I think, 58 assets or so where they own 15-25% interest. And we would continue to talk about those with them as well as other possibilities.

Operator

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

Rich Anderson - BMO Capital Markets

On the Lillibridge acquisition frankly the high 7% cap rate seems high to me for an on campus portfolio presumably with good quality. I'm wondering what drove that number up to that range. I was thinking more closer to a seven type number in terms of my analysis. Are you assuming occupancy improvement from the 87 to get to the high sevens?

Debra Cafaro

Again the fully integrated P&L and it does represent an attractive 150 to $160 per square foot for our share of the asset. I think when we look to acquire the interest from the institutional partner, we very much wanted the Lillibridge team and the capabilities and as we've mentioned all of the things that the company provides but we, the cap rate is high but then again there are these that as you look at the P&L, the 15 times EBITDA we thought was a reasonable multiple, and so really it's just an allocation issue as to how you allocate to the real estate versus the services business and the cap rates, we think appropriate in the context of the integrated P&L business at a 15 times EBITDA.

Rich Anderson - BMO Capital Markets

And in terms of the future, the future holds for you and the MOB business, what is currently sort of in your mind an optimal level, right now you're, I guess, a little bit north of 8% of the businesses in medical office now with Lillibridge. Where do you see Ventas going over the next several years in terms of its exposure to the business to its overall portfolio?

Ray Lewis

Well Rich, this is Ray. I'd like to see that percentage be more like 15 or 20% of our portfolio.

Rich Anderson - BMO Capital Markets

Okay, that's good. And then with regard to the joint venture arrangements you have embedded within the transaction, to what extent do you see that as a pipeline of acquisitions over the next year or two to take out some of those partners interest if at all?

Ray Lewis

Yes, sure. I mean we have the right the first offer embedded in those and other contractual rights that could lead to an opportunity to acquire those assets as in when the joint venture partners look for liquidity so that is definitely a benefit of the transaction that we are excited about.

Rich Anderson - BMO Capital Markets

Okay, and lastly, to Rick. Is there any material change to the balance sheet July 1 after I guess not? You're just kind of moving debt for debt type transactions with regard to the debt pay down, is that right or you still…?

Rick Schweinhart

I'd say that since we bought the whole thing with cash, you're going to see a little bit of an increase in the net debt to EBITDA but not very much.

Debra Cafaro

And we assumed $125 million of debt.

Rich Anderson - BMO Capital Markets

One last question. Relative to that 87%, what is viewed as like the normalized occupancy in that portfolio? I mean, has it maybe this is a question for Todd or somebody, but has it been normally above 90% over history?

Debra Cafaro

We believe it was in the sort of 89ish, 89 to 90 and so that will be a target to really as we discuss sort of get that occupancy and the NOI improving.

Operator

Your next question comes from the line of Bryan Sekino with Barclays Capital. Please proceed.

Bryan Sekino - Barclays Capital

Just a quick follow-up on comments about the $3 million expenses from Sunrise. Is that on the expense line and your stabilized portfolio?

Debra Cafaro

It is it's an expense. It's on the expense line but it's across all 79 assets.

Bryan Sekino - Barclays Capital

All 79, okay. So I guess the pricing of the 178 average daily rate is not…

Debra Cafaro

That's correct. It doesn't affect the average daily rate which was a good level of 178.

Bryan Sekino - Barclays Capital

Okay. And then just on the back half of the year for margins in the Sunrise portfolio, what are your expectations in terms of potentially keep it where it is or if there's going to be any additional pressure?

Debra Cafaro

So when we look at the second half of the year, in our guidance at the mid point we're assuming that it'll look a lot like the first half of the year, ex that $3 million payment. I think what we're expecting is that occupancy will trend up a little bit, ADR will be flat and we'll probably see some expense creep as we always have in the second half of the year as utilities and other back-end loaded expenses grow, we'll perhaps compress margins slightly. But the net-net effect of all of that should be a second half that looks a lot like the first half.

Operator

Your next question comes from the line of [Suzanne Kim] with Credit Suisse. Please proceed.

Unidentified Analyst

Just calling about a couple of different things. What are your opportunities with the managed properties? Are they about the same quality as your owned properties as Lillibridge acquisition?

Debra Cafaro

Yes. As you mentioned, of the $6.9 million square feet in the Lillibridge portfolio, we do manage for third parties about 1.2 million square feet, 31 buildings, and those are managed for both hospitals and private owners, and over time, it's a classic real estate opportunity that over time sometimes property managers who are also owners have opportunities to buy those buildings and time will tell that certainly it's - like the (inaudible) certainly another place where there is a long term potential opportunity, or it could lead to development opportunities as well.

Unidentified Analyst

So do you think the quality is about the same?

Debra Cafaro

Yes. It's comparable.

Unidentified Analyst

It's comparable. And with regard to the management platform that you just purchased, are there synergies with the current portfolio and that of Lillibridge?

Debra Cafaro

Yes. I mean I think - I'll answer that directly. On the 15 times EBITDA, we have paid these multiples and these cap rates on in place NOI and EBITDA, and so we feel very good about that valuation. Over time, we do believe that we will capture, we believe it's scalable; we will capture more profit through acquisitions, development, property management, et cetera, without adding additional overhead.

And over time, there may be efficiencies that are obtained as we combine our organizations into one company. And - but again, the acquisitions really about strategic growth. And if we can scale the platform and retain development profits and do see development and really grow the NOI and not grow the overhead, we are going to capture a lot of that to the bottom line.

Unidentified Analyst

One last question. I'm just curious about the MOB sector in general, wondering about the segmentation of that. How big do you think in terms of square footage is the current market out there and how much do you think that's sort of the larger players and maybe it's some of the REITs have what percentage do you think that they have control over?

Debra Cafaro

Yes. It's about $175 billion market and it's very highly fragmented. I mean, hospitals are by far and away the lion's share owners of the assets and that's really I think where the opportunity ultimately, that's a big part of the opportunity because the hospitals are not necessarily the most efficient owners of the assets. They have a lot of capital needs and we are a much more efficient owner of the assets. The Lillibridge team has the relationship with those hospitals. So over time, we believe the macro trend, again a long term secular trend will be that the hospitals will want to sell the assets to owners like ourselves and that's the opportunity.

Rick Schweinhart

But the REITs just own a very, very small percentage of the total market. I mean not even a measurable percentage.

Ray Lewis

So the good news and this is partly why we feel good about being in this business. We only need a little tiny part of this market to be wildly successful, and I've got to believe with our balance sheet and the Lillibridge team and a track record and the relationship that we will be able to achieve that.

Operator

Your next question comes from the line of Todd Stender with Wells Fargo Securities. Please proceed.

Todd Stender - Wells Fargo Securities

The $76 million in mortgage debt that still remains outstanding from the Lillibridge portfolio, what are the maturities for those and does your guidance assume that any part of that's paid off this year?

Debra Cafaro

There's 76 on the wholly owned and then 49 on our share on the joint venture assets. The 76 is longer dated debt and it goes way out and so you should not assume we'll pay that off. The 49 about 80% of it comes to by 2013.

Todd Stender - Wells Fargo Securities

And then on the four senior housing communities that were sold in the quarter, did you provide any seller financing on those?

Debra Cafaro

Nope. Those were all cash transactions.

Todd Stender - Wells Fargo Securities

Okay, were they subject to a tenant purchase option?

Rick Schweinhart

No.

Operator

Your next question comes from the line of Rob Mains with Morgan Keegan. Please proceed.

Rob Mains - Morgan Keegan

I thing it's cleared that most of my questions just a couple things I want to clarify. When you talk about the Lillibridge NOI, is that the consolidated for the 38 that you own plus the equity income on the joint ventures?

Rick Schweinhart

Exactly. It's our pro-rata share on the JVs and 100% on the wholly owned.

Rob Mains - Morgan Keegan

Okay, and then the discussion you had of the Lillibridge related expenses, are those going to be kept separate from G&A or are you just, at this point for illustrative purposes when Rick was talking about G&A they are separate and you'll figure out treatment on your income statement later?

Rick Schweinhart

Yes, they will be in our P&L and then they will be segmented.

Rob Mains - Morgan Keegan

Okay, fair enough. And then when I look at the capital expenses to-date, obviously that changes post-Lillibridge. They've been lighter than last year. Should we be looking at any particular seasonality for CapEx or is that something we should ratable assume it's spread over the year?

Rick Schweinhart

Definitely not ratable. I think experience from time in memorial is that people get budgets and they spend all of the money in the latter half of the year, so we'll definitely ramp up towards the third and fourth quarters in terms of cash expenditures.

Rob Mains - Morgan Keegan

Okay. And then last question I had when I look at the revised guidance, the normalizing adjustments went up a lot, even more than what we see in the first half of the year. Do I assume a lot of that is integration expense?

Rick Schweinhart

Yes, I mean it's the old costs which are the biggest part of it which as you'll recall in the old days would be capitalized but under the new rules are not capitalized, so deal cost is the biggest percentage of that and then some integration and transition expenses.

Operator

Your next question comes from the line of Tayo Okusanya with Jefferies and Company.

Tayo Okusanya - Jefferies and Company

Quick question, in regards to Lillibridge and you did talk about occupancies and kind of the target of 89 versus 87 right now, could you give us a sense of as you kind of look at the company and your outlook for the MOB space over the next 12 months what you expect in regards to the ability to maintain margins on the same kind of sense of what you think the same-store NOI growth out of that just the Lillibridge portfolio could be?

Debra Cafaro

Yes, I think what we mentioned is that we're actively working on a very detailed leasing plan with targeted leasing to improved NOI and improved occupancy and I think what we'd like to do is really provide you with more color as and when we get closer to providing 2011 overall guidance.

Tayo Okusanya - Jefferies and Company

Okay. I'm thinking of 2011 guidance. That's helpful. That's okay. And then on the skilled nursing side of the business, with some of your tenants now they probably have received some of their rate change letters from the different states. Just curious what you're hearing from them in regards to rate changes they're seeing in particular states which states are up, which states are flattish, which states are down materially?

Debra Cafaro

Well, we really have very diversified portfolio. As we think about diversification of our portfolio across four metrics, by tenant, by asset type, by reimbursement source and by geography. And so we're in 44 states in Canada. And so that one of the benefits of that geographic diversification is that Medicaid is a state by state program.

Tayo Okusanya - Jefferies and Company

Right.

Debra Cafaro

And none of our states really account for one or two may account for more than 10% of our NOI and not all of that will come from nursing homes, so when you really get down to it, we have the benefit of a broadly diversified portfolio. And as I mentioned Medicare on the skilled nursing is going to be up and that's a positive. And we continue to believe that on average, we will see positive Medicaid. It will be a small positive increase but we do believe that Medicaid rates on average are going to be positive.

Tayo Okusanya - Jefferies and Company

I guess I understand when you kind of have it at the top level that assessment, but I was just kind of curious even if an average are up slightly just what the dispersion was in regards to some states that are really up versus some states that are really down. Do you have a sense of that at this point or not really?

Debra Cafaro

I mean, we do but again, as the landlord, these are very small changes in various states Medicaid reimbursements have essentially a de minimis impact. They have no impact on our earnings or our rent and they have a de minimis impact even on coverages. And so we're really focused on the total portfolio and gaining the benefits of that diversified portfolio and so that's probably the best way to think about it is that overall, we expect it to be positive.

Tayo Okusanya - Jefferies and Company

All right, and then Ray, your previous comment in regards to the MOB portfolio, your target of MOB hopefully being 10% to 15% caught my attention. Does that, now that you're done with Lillybridge and you're at eight, does that basically mean other public REITs for example, that are out there, small platforms could still be of potential interest to you on the MOB side?

Rick Schweinhart

Sure, and what I said I think was 15% to 20% of our portfolio and so obviously, that is a sizeable investment appetite. As Debby pointed out in her comments, it's a huge universe and a lot of the MOBs are owned by hospitals that will need capital over time, hospitals that Todd and his team already have relationships with either as a Manager or just through their general calling and relationship building efforts, so that's the biggest opportunity set.

As we mentioned, the REITs themselves own a very small percentage of the medical office target set. That being said, we are always considering opportunities, always looking at ways to grow the Company. We've always said that we think there should be less, not more healthcare REITs and so if and when the right opportunity presented itself we would certainly pursue it.

Debra Cafaro

Okay. I think we have one more question?

Operator

Yes, your final question comes from the line of John Roberts with (inaudible). Please proceed

John Roberts

I following up on that last question, could you discuss a little comparison with where you are now and where you see the Company going on a property type basis, and the types of capital you most look like you're going to tap going forward at least in the near-term for acquisitions?

Rick Schweinhart

Well, I'll attack the first part of that question, which is clearly we are going to grow our medical office portfolio disproportionately to the balance of our portfolio. I would expect our seniors housing portfolio to remain relatively constant in terms of percentages as the portfolio grows, and I would expect skilled nursing and hospitals to shrink as a percentage of the portfolio. However, we will continue to make investments in that area, just not at the same rate that we make them in seniors housing and medical office. Is that helpful?

John Roberts

Absolutely.

Debra Cafaro

Okay, and then so we have as usual, I think we have a pretty well defined and articulated investment strategy. In terms of funding that strategy, we have worked very hard for a long period of time to get the kind of balance sheet strength that we now have and as Rick pointed out we're about four times debt to EBITDA at the end of the quarter. And so we have access to lots of different pockets of low cost capital and I think we have quite a bit of continued acquisition capacity using those various forms of debt capital going forward.

John Roberts

So the majority of the near-term acquisition capital would be debt?

Debra Cafaro

Yes, I mean, I think that we very much value our strong balance sheet and we will continue to manage the firm extremely prudently and with an eye toward moving up the credit curve as we have done. But at the same time, I think we have lots of room in that balance sheet to continue, lots of both room on the credit stats as well as liquidity to continue to grow and diversify the business.

So, with that, is that our last question, David?

Debra Cafaro

Okay, great. So I really want to thank everyone for participating in today's call and we as always we very much appreciate your interest in Ventas. We're happy to report excellent results and as, we are very focused on building an excellent and sustainable enterprise that will deliver value to stakeholders through our productive high quality diversified asset base, a secured financial profile, consistent and growing cash dividends, and accretive acquisitions.

So with that we look forward to talking to all of you and thank you again for your time today.

Operator

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

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