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Ventas, Inc. (NYSE:VTR)

Q3 2010 Earnings Call Transcript

November 5, 2010 11:00 am ET

Executives

David Smith – IR

Debra A Cafaro – Chairman and CEO

Ray Lewis – Chief Investment Officer

Rick Schweinhart – CFO

Todd Lillibridge – CEO, Lillibridge

Analysts

Clinton Valleli – Citi

Rick Anderson – BMO Capital Markets

Jerry Doctrow – Stifel Nicolaus

Bryan Sekino – Barclays Capital

Rob Mains – Morgan Keegan

Tayo Okusanya – Jefferies & Company

Operator

Good day, ladies and gentlemen and welcome to the Ventas third quarter 2010 earnings conference call. My name is Alika [ph] and I will be your operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session at the end of the conference. (Operator Instructions).

At this time, I would now like to turn the call over to Mr. 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 September 30, 2010. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws.

These projections, predictions and statements are based on management's current beliefs as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission including the company's annual report on Form 10-K for the year ended December 31, 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 in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com.

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

Debra Cafaro

Thanks, David. And good morning to all of our shareholders and other participants. And welcome to the Ventas 2010 third quarter earnings call. My colleagues and I are pleased to join you today from our Chicago office.

I'd like to address our recent acquisition activity and this quarter's excellent earnings. Ray Lewis will cover operations and investments. And after Rick Schweinhart reviews our financial results in detail we'll be happy to take your questions. Ventas has been very active since the beginning of the third quarter. We closed our Lillibridge acquisition, announced a mutually beneficial deal with Sunrise Senior Living, we agreed to acquire the real estate assets of Atria Senior Living Group and we made important organizational moves.

First, we closed the acquisition of Lillibridge Healthcare Services, adding 96 medical office buildings to our portfolio and becoming the national leader in integrated medical office building ownership, development, property management and advisory work. Both the MOBs and the Lillibridge service businesses are performing well, slightly ahead of our expectations and the combination of our firms is complete. We are enjoying our new relationship with Todd Lillibridge and his organization and we look forward to building our businesses together.

Second, we were very pleased to announce an attractive transaction with Sunrise Senior Living to purchase all of its real estate interest in our Sunrise managed high quality assisted living portfolio and amend our management contracts with Sunrise. Our collaboration with Sunrise and its management resulted in a multi-faceted transaction that benefits both companies and we are working together to close that deal in the coming weeks. We are really starting to see the benefits of the focused efforts of the Sunrise team and the quality of our Sunrise managed assets as our NOIs and occupancies in our Sunrise portfolio continue to improve.

Third, we recently agreed to acquire the real estate assets of Atria Senior Living Group for $3.1 billion. This exciting and transformational investment will add 118 high quality private pay seniors housing assets to Ventas' portfolio and will make us the largest donor of seniors housing in the U.S. We are acquiring high quality assets in superior locations with excellent growth prospects.

As structured, the transaction will increase the amount of Ventas NOI derived from private pay sources to fully two-thirds, improve our tenant operator diversification, expand our scale to over 700 assets and a $14 billion enterprise value and last, keep us in a strong and safe balance sheet position.

Finally, Atria is a fantastic operator of seniors housing with a robust scalable infrastructure and an excellent team committed to high quality care for seniors. Atria will be owned by Lazard and the management team as an independent private company, following the closing. Supply demand fundamentals in the senior housing sector are extremely favorable and Ventas is well-positioned to enjoy the benefits of these powerful demographic trends through our ownership of over 35,000 units of independent and assisted living.

Importantly, the best assets in the best markets are Sunrise and Atria assets, are in a management contract or RIDEA structure so the growth in these assets will flow directly to Ventas shareholders. We strongly believe that the Atria transaction will create value for Ventas stakeholders. It represents our sixth major acquisition since 2004 and advances our strategic vision of building an excellent, high performing enterprise composed of diverse and productive healthcare and senior living assets.

Earlier this week, I was genuinely delighted to announce the promotion of my colleague, Ray Lewis to President of Ventas. Ray's promotion is well deserved and recognizes his many contributions to our success, his leadership and his commitment to our Firm. Ray will continue to supervise all of our investments and our asset management function for our soon to be $14 billion portfolio.

Overall, we are very fortunate to have a dedicated group of professionals with a lot of continuity at Ventas. It is the combination of our cohesive team and our growing diverse asset base supported by powerful demographic trends that position Ventas for another decade of success and excellence.

Moving to the quarter, we're very happy to report positive news on many fronts. We have excellent normalized FFO per share this quarter of $0.73, an increase of 11% over the prior year, improving occupancies and NOI in our Sunrise portfolio that Ray will discuss in greater detail.

Year-over-year, same store NOI growth for our whole portfolio of 5.6%. Cash flow from operations growth of 8%, compared to the 2009 same period. A great balance sheet with low leverage of 4.3 time’s net debt to EBITDA and 26% debt to enterprise value. And, as a result of all of these factors, we are increasing our 2010 normalized FFO guidance to $2.84 to $2.86 per share. At the midpoint, this would equal 6.3% year-over-year per share growth.

With that overview, I'd like to turn the call over to our newly appointed President, Ray Lewis.

Ray Lewis

Thanks, Debbie. Our diversified portfolio of roughly 600 properties experienced another quarter of strong performance. These high quality assets have Best-in-Class tenant operators and will be complemented by our recent announcement that we will acquire 118 senior housing properties from Atria, the country's fourth largest operator.

Upon the closing of the Atria transaction, Ventas' portfolio will increase to over 700 assets in 44 states and two Canadian provinces and will be well diversified by tenants, operator, pay or source and asset class. Let me start by talking about the performance of our triple-net lease portfolio where Ventas receives approximately 69% of its NOI.

As you'll recall, this portfolio provides stable and growing cash flows backed by pooled multi-facility master leases with credit and structural support from industry leading operators. During the second quarter of 2010, the most recent available, cash flow coverage was a strong 1.7 times. Occupancies in our triple-net seniors housing portfolio continue to trend positively during the second quarter, up 60 basis points sequentially and 270 basis points year-over-year.

Moreover, same store cash flows to Ventas continued to grow steadily during the third quarter at 2.6% year-over-year, on track with our guidance at the beginning of the year. We continue to have minimal near term lease maturities with less than 1% of the portfolio rolling before 2013 and an average remaining lease term of approximately six years.

Our tenant, Kindred which currently accounts for 36% of Ventas' NOI and is the largest provider of post acute care in the U.S., reported another great quarter of earnings with operating cash flows up 18% year-over-year and third quarter earnings per share at the top end of its corporate guidance. Additionally, Kindred should benefit from the better than expected final ruling for Medicare Part B therapy was that was released on Tuesday.

Now let's turn to Ventas' operating portfolio which is comprised of 79 high end mansion style assisted living communities managed by Sunrise Senior Living and 153 medical office buildings managed by Lillibridge and other third party managers. This portfolio accounts for approximately 28% of Ventas' NOI and provided another quarter of strong performance.

Starting with our Sunrise portfolio, which accounts for 19% of our NOI, the third quarter exhibited strong occupancy gains. Third quarter occupancy in our 78 stable assets was 89.5%, up 110 basis points over the second quarter. This positive trend and stabilized occupancy has continued into the fourth quarter as the portfolio is currently over 90%.

As the economy has stabilized, these need driven assets are benefiting from strong industry fundamentals as there is limited new supply and a fast growing 85 plus population fueling demand. NOI for all 79 communities during the third quarter was $39 million which includes the receipt from Sunrise of a $2 million cash payment for prior period expense overruns.

Excluding this payment, NOI was up 11% over the comparable 2009 period driven primarily by the previously mentioned occupancy gains as well as rate increases and increased margins. Quarter-over-quarter for our 78 stabilized communities margins, excluding the cash payment, increased 50 basis points to 33.3% in the third quarter.

Ventas also has one lease-up asset located in Toronto known as Steeles which continues to march toward stabilization. Third quarter occupancy at this 229 unit independent living asset was stable at 86.7%, though our latest reports on spot occupancy show it trending above 90%. We continue to be pleased with the performance of this property.

Finally, as previously announced, Ventas entered into an agreement with Sunrise to acquire the minority interests in 58 of the Sunrise communities for $186 million including $145 million of mortgages already on our balance sheet. This represents over a 10% capitalization rate on in place NOI.

Upon closing, we will own 100% of all 79 Sunrise properties in our portfolio. We also negotiate improvements to our management agreements with Sunrise including a reduction in the Sunrise management fee to 3.5% of revenues for most of 2010 and 3.75% for 2011. After which, the base management fee will be 5% to 7% of revenues.

Due to the strong performance and the positive occupancy trends we are seeing to date coupled with the favorable restructuring of our management contracts, we are increasing our 2010 NOI guidance for the Sunrise portfolio to $150 million to $154 million, compared to our prior guidance of $139 million to $145 million. At the midpoint, this equates to a year-over-year NOI growth of 16%.

Excluding cash payments we have received from Sunrise and the expected pickup from a lower management fee, Ventas' year-over-year growth for this portfolio is still an impressive 8.5% at the midpoint of our guidance range which gives confidence to our expectations for the to be acquired Atria assets.

Now let's turn to our medical office portfolio. The third quarter represented our first full quarter of ownership of Lillibridge which closed at the beginning of the quarter. Combined with Lillibridge, Ventas now owns and manages 153 medical office buildings across $8.6 million square feet and accounts for 9% of the company's NOI.

Ventas' stable consolidated MOB portfolio of 57 assets continues to post strong occupancy, exceeding 94% and good margins exceeding 65%. Regarding our Lillibridge portfolio, third quarter results exceeded our underwriting projections. During last quarter's call we told you that we expected second half cash NOI to approximate $13.5 million to $14 million. Our latest projection is forecasting cash NOI to equal or slightly exceed $14 million. If achieved, this would equate to a cash yield of approximately 8% and a GAAP yield of over 9%.

We are pleased with the initial performance of our Lillibridge MOB portfolio, along with the Ventas legacy portfolio. We intend to expand our medical office platform through the combination of Lillibridge's brand, experience, tenured professionals and long standing relationships with highly rated hospital systems along with Ventas' cost of capital, legacy partnerships and investment team.

Turning to the acquisition environment, the big news at Ventas is our previously announced $3.1 billion agreement to acquire from Atria 118 senior housing properties that Atria will manage under long-term management agreements. Pro forma for the Atria acquisition, Ventas has announced $3.6 billion of acquisitions during 2010. Moreover, we have significantly advanced two key strategic objectives by creating the market leading fully integrated medical office ownership, management, leasing and development company and adding another top tier senior housing provider to our stable of Best-in-Class tenant operators.

After the closing we will be doing business with four of the five top senior living operators in the US. With regard to market, deal flow has been steadily increasing during the quarter. The pipeline remains strong and we are continuing to see and consider a number of interesting opportunities across the healthcare real estate landscape. We have also announced the addition of John Cobb as our new Chief Investment Officer. Through his years as a senior executive at GE Healthcare Financial Services and Heller Financial, John has developed a deep role of decks of healthcare real estate contacts and an established track record of growing healthcare real estate financing businesses and leading teams of investment professionals. Moreover, John’s recent experience running a senior housing company gives him a unique insight into the operation of Seniors’ housing assets.

So I am pleased with the progress we have made across the company this year and look forward to continuing that momentum into the fourth quarter and into next year. With that, I will turn the call over to Rick Schweinhart to discuss our financial results.

Rick Schweinhart

Thank you, Ray. The highlights of the third quarter are that on July 1st, we acquired Lillibridge Healthcare Services and their consolidated operating income was up for the last year’s third quarter and also increased compared to the second quarter. Third quarter 2010 normalized FFO was $0.73 per diluted share, an increase of 10.6% compared to the third quarter of 2009 on 1% more shares outstanding.

Additionally, we continue to focus on maintaining a strong balance sheet and increasing cash flows from operations. At September 30th, our cash balance was $34 million and we had $244 million outstanding on our revolving credit facility. Our credit stats remained excellent with net debt adjusted pro forma EBITDA at 4.3 times and our fixed charge coverage ratio is in excess of three times.

Our September 30, 2010 debt-to-enterprise value is 26%. Our cash flow from operations for the quarter ended September 30, 2010 increased to $138 million, from $128 million for the comparable quarter last year, up 8%. We currently have approximately $30 million of cash and $240 million outstanding on our revolving credit facility.

During the quarter we had three items of note. First, the debt activity. In July, with the acquisition of Lillibridge, we assumed $79 million of mortgage debt with an average 6.3% rate. We also assumed $29 million of debt which was paid one week after the acquisition. In August, we repaid $80 million of maturing mortgage debt with an interest rate of 7.75% [ph]. In September, we closed on a $200 million three year unsecured term loan with a 4% fixed interest rate.

The proceeds were used to pay down the revolver. Second, normalized FFO includes a $2 million cash payment from Sunrise for the expense overages and third, merger related expenses and deal costs totaled $5.1 million in the quarter, primarily due to our July 1st acquisition of Lillibridge. After quarter end in October, we repaid the remaining outstanding balance of $71.7 million of our 6 5/8 senior notes due 2014 with a premium of $1.6 million.

Details of the third quarter earnings are as follows. Normalized FFO was $115.4 million, or $0.73 per diluted share. Normalized FFO includes the previously mentioned $2 million cash payment from Sunrise and excludes the $6 million net expense consisting of merger related expenses, integration costs and deal costs which I mentioned before and non-cash income tax expense.

Third quarter normalized FFO increased from last year’s third quarter due to NOI increases in all three of our portfolios, triple net, Sunrise-managed and medical office buildings. Triple net lease revenues grew to $117.9 million, from $115.8 million last year, primarily due to contractual escalations. Sunrise managed NOI increased 17% to $39 million this quarter, from $33.4 million last year. Third quarter 2010 NOI includes the Sunrise $2 million cash payment as a reduction of expenses. Excluding the $2 million, Sunrise managed NOI increased 11%.

In comparison, second quarter was $38.8 million, which included $3 million cash payment from Sunrise for expense overages. Due to the Lillibridge acquisition on July 1st, third quarter medical office building NOI grew from $5.8 million to $16.3 million including $1.4 million in unconsolidated joint ventures. Second quarter MOB NOI was $8.1 million.

Consistent with our projections, Lillibridge contributed $6.5 million in EBITDA in the third quarter, inclusive of all Lillibridge G&A. Partly as a result of the Lillibridge combination, consolidated G&A in the third quarter including stock-based compensation, totaled $15.3 million, up from the $9.9 million in the second quarter. Interest expense was up at $45.5 million this quarter, compared to last quarter’s $43.8 million, primarily due to the Lillibridge acquisition. Weighted average shares outstanding in the quarter at 157.9 million, increased 1% over third quarter of last year and remained fairly flat versus 157.4 million in the second.

We are increasing our 2010 normalized FFO per diluted share guidance to $2.84 to $2.86 from $2.75 to $2.80. This reflects the positive trends in our Sunrise portfolio, our negotiated Sunrise management fee adjustment and our Lillibridge acquisition. This positive trend is indicative of the growing and reliable cash flows that our diversified high quality and productive portfolio of healthcare and senior housing continues to provide.

Our key assumption for our 2010 normalized FFO per share guidance is that total Sunrise NOI for our 79 assets including the negotiated management fee adjustment ranges from $150 million to $154 million and consistent G&A for the fourth quarter. Our guidance does not include other material acquisitions or divestiture activity, deal costs, capital transactions, non-cash income tax expense or litigation expenses or proceeds.

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 Clinton Valleli with Citi. Please proceed.

Clinton Valleli – Citi

Hi, good morning, guys. I’m here with Michael Bilerman. Just in terms of the Atria acquisition, you obviously see some additional upsides in those assets on the RIDEA structure. Of that about 160 seniors housing assets that you own under a triple net lease, do you see some additional long-term upside there and is there any possibility that over time you might want to move them into a RIDEA structure?

Ray Lewis

Hi, Clinton, this is Ray. You know, I think there is some additional upside in those assets through redevelopment and we’ve had some discussions with our tenants about ways that we can work together to – for us to provide capital to them to redevelop some of those assets at Alzheimer’s wings, expand, et cetera. And those are very attractive investments because you get to leverage all the fixed costs in the building and all the common area that exists. So, the returns tend to be pretty high as you can see from the materials we prepared for Atria.

With respect to transitioning those assets to RIDEA structures, I don’t think we have any current plans to do that. But I think if we talk with our operators and it made sense for both of us to do that, it’s something we would consider.

Clinton Valleli – Citi

Okay. And then maybe just switching to Lillibridge, now that it’s in the platform, can you give us an update on what you’re seeing in terms of the potential acquisition pipeline and maybe also any new development opportunities that are outside of the development pipeline?

Ray Lewis

Yeah, Todd and his team has been out in the market, telling the story to their important hospital relationships and it’s being very well-received and as a consequence, we’re seeing both an increase in acquisition opportunities and development opportunities coming into the pipeline. Development opportunities, as you probably know, are longer lead time transactions. We did announce the Baton Rouge transaction and we hope to follow with more on the heels of that. With respect to acquisitions, the pipeline is pretty strong. We’re working on a number of things that we hope we’ll be able to get done in the near term.

Clinton Valleli – Citi

Okay. Thank you.

Operator

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

Rick Anderson – BMO Capital Markets

Hi, good morning everyone.

Debra Cafaro

Hi, Rich.

Rick Anderson – BMO Capital Markets

First question is very important. How is Walter doing?

Debra Cafaro

Well, you mean Walter Breuning, the oldest man in the world?

Rick Anderson – BMO Capital Markets

Yes, yes.

Debra Cafaro

Well, he actually recently had to go to the hospital, but we’re all wishing him a speedy recovery. He’s an amazing, wonderful guy.

Rick Anderson – BMO Capital Markets

I am sure.

Ray Lewis

On the good news front, Rich, he’s moved up on the list.

Rick Anderson – BMO Capital Markets

Okay. Okay. Question on deal flow, you guys obviously have been very active. Your leverage, post Atria, is up relative to maybe what your benchmark, your comfort level is but still reasonable. But, you know, considering your desire to be conservative with the balance sheet, do you think that you need to de-lever significantly before you can go out and do anything sizable? Or would you be willing to allow your debt-to-EBITDA to get into the 6 or 7 handle range?

Debra Cafaro

Rich, this is Debbie. As you know, we have over a long period of time managed the Company to both grow FFO per share, but also to maintain a lot of financial strength and flexibility. And we are committed to balancing those two objectives, which is how we believe we’ve been able to create and preserve shareholder value. And so we’re very comfortable with the pro forma net debt-to-EBITDA with the way we’ve structured the Atria acquisition to be very balance sheet friendly and also – which is good for our debt holders, but also protects our equity holders as well from market risks. And we are very comfortable with where we'll be which is at about 5.6 times net debt-to-EBITDA on a pro forma basis at closing.

And we will continue to manage the firm with those two objectives strongly in mind and I think that in doing so, we will continue to really benefit all of our stakeholders.

Rick Anderson – BMO Capital Markets

Okay. Did I read right that – I don't remember if it was Moody's or one of the other agencies, but that they maintained their rating on the presumption that your net debt would drop to five times in short order. Is that correct?

Debra Cafaro

Look, I mean, in terms of Ventas’ ratings, it’s first of all important to note that we do have three investment grade ratings. It’s also important to note that our credit statistics really are at a level that even with the closing of Atria would merit a higher rating and we do intend to continue moving up the credit curve. Because Ventas’ cash flows significantly, it’s very easy for Ventas to what I would call de-lever organically or naturally and so there’s no pressure on Ventas at any time to do anything other than close the transaction on the terms that we’ve announced.

Rick Anderson – BMO Capital Markets

Okay. Last question is as you’ve gone through the process with Atria and you have what some might call an overhang with the 85% of the stock being saleable at the close, have you gotten any sense from Lazard what they might do with those shares at this point?

Debra Cafaro

Yes. I mean, thank you for answering that – and for asking that. As we talked about in the original Atria call, we are issuing a $350 billion of equity to Lazard at the closing. They really believe in Ventas and they believe in their own assets and so we have great alignment with them and I think their confidence in Ventas is being rewarded.

We have a very carefully designed set of contractual arrangements between the two firms that are really designed to continue to support Ventas equity and while 85% of the shares are not technically locked up, they’re a significant sort of time, place and manner governors around how those shares will be held and transferred. And I think most importantly, Lazard has a long history of numerous occasions of being invested in REITs in the past. They’ve been excellent, responsible shareholders and have done what’s really – what’s in their interest, which is to really care about maximizing the value of that equity and we fully expect them to do the same here.

Rick Anderson – BMO Capital Markets

Okay. Thank you very much.

Debra Cafaro

Thank you.

Operator

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

Jerry Doctrow – Stifel Nicolaus

Thanks. One big one and a couple of little ones. Debbie, my sense was that you were about at your limit in terms of the percentage of NOI you wanted from

senior housing operating assets and so that you would be unlikely to do more RIDEA transactions this size. Is that accurate?

Debra Cafaro

Well, as you know, Jerry, we are constantly trying to calibrate a portfolio that is balanced in terms of asset type and structures, triple-net operating, et cetera and we believe that that kind of portfolio will deliver value in all kinds of environments and deliver reliable cash flows to shareholders and that's really what we're aiming for.

And with the Atria transaction, we will have about a third of our portfolio in senior housing operating transactions. We do expect Ventas to continue to grow and evolve over time and we will continue to evaluate different transactions as they present themselves on their merits.

Jerry Doctrow – Stifel Nicolaus

So you could see yourself having more than a third of NOI from senior housing operating assets?

Debra Cafaro

Well, I think, look, we're going to grow the business in numerous ways including medical office, as Ray has talked about and our bread and butter, triple-net lease structure and we will continue calibrating the portfolio in a way that we think continues diversification, balance and this non-correlated reliable cash flows going forward.

Jerry Doctrow – Stifel Nicolaus

Okay. In terms of – one of the things that's frustrating us I guess in terms of the numbers is you stopped providing maintenance CapEx and I'm trying to understand why and whether we can get some more color on sort of CapEx in general, maintenance CapEx.

Debra Cafaro

Yes. Sure. We don't want you to be frustrated, actually. We actually have a different disclosure that's on our supplemental now that really talks about all of our different CapEx buckets. In terms of the senior housing, really it's, as we've talked about, $1,250 to $1,500 per unit per year. And Ray can talk about the MOBs.

Ray Lewis

With respect to the MOBs, it's about a $1 a foot and that breaks down roughly $0.30 routine, $0.70 non-routine, plus or minus.

Jerry Doctrow – Stifel Nicolaus

Okay. And as we think about Atria, any significant CapEx demands there in terms of repositioning their assets? I think there was some that you committed to like $85 million or so, but just a sense of how CapEx plays into that.

Debra Cafaro

Well, I'll take the first part of it and then Ray will take the second part of it. In the near term, the CapEx and the eight redevelopment assets is essentially baked into the purchase price and most of it will already have been– substantially all of it will already have been expended by the time that we close.

Jerry Doctrow – Stifel Nicolaus

Okay.

Debra Cafaro

On a longer term basis, I'll turn that over to Ray.

Ray Lewis

Well, I mean, I think the CapEx that we're projecting in that portfolio would be comparable to what we're spending in our Sunrise portfolio in that $1,250 to $1,500 per unit that Debbie described earlier.

Debra Cafaro

Yes. And over time there may be assets in exceptional locations where we will choose on a risk-adjusted basis to undertake redevelopment projects and commit capital where we think there will be a 15% to 20% return, as market conditions warrant. But that will all be discretionary after the closing.

Jerry Doctrow – Stifel Nicolaus

Are we likely to see disclosure on the Atria portfolio separate from Sunrise or are we going to see them on a consolidated basis when you – after the deal closes?

Debra Cafaro

That's a great question. I think we're really focused on closing the transaction and I think that at that point in time we'll try to figure out the best way to give disclosure to investors and we actually welcome people's thoughts on what would be most helpful to them.

Jerry Doctrow – Stifel Nicolaus

I opt for separate, if we can and my vote counts.

Debra Cafaro

I'm shocked. Jerry, I'm shocked.

Jerry Doctrow – Stifel Nicolaus

And just last thing and I'll jump off. Any other just infrequent items, lease terminations views or anything else in the quarter, we didn't see any and I just wanted to make sure.

Debra Cafaro

No.

Jerry Doctrow – Stifel Nicolaus

Okay. Thanks. Thank you.

Debra Cafaro

Thank you for joining. We appreciate it.

Operator

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

Bryan Sekino – Barclays Capital

Hi, good morning.

Debra Cafaro

Good morning.

Ray Lewis

Hi, Bryan.

Bryan Sekino – Barclays Capital

Just a question on the senior housing operating portfolio. I know you had been cautioning about some margin pressure and I do see the costs came up on an absolute dollar. Would you say it was – the outperformance in the quarter was more on the top line or lower expenses?

Ray Lewis

I think the occupancy and the rate were the biggest drivers for sure and the occupancy certainly being the largest of the two. So, the expenses were within normal tolerances.

Bryan Sekino – Barclays Capital

Okay. And I'm not sure if you had given this out, but what was the management fee before the renegotiation with Sunrise?

Debra Cafaro

It's been running in the 5% to 5.25% range this year-to-date.

Bryan Sekino – Barclays Capital

Okay. Great. Thanks.

Debra Cafaro

And by the – just so everyone knows, the reduction to 3.5% is not included in this quarter's numbers but is included in our forward guidance, assuming that the transaction closes. So that will be a – that will be seen in the fourth quarter.

Bryan Sekino – Barclays Capital

Okay. And then just on the G&A side, I know you had given out some numbers last quarter for the Lillibridge acquisition. I think $15 million on annualized basis. The increase sequentially, here, of 5.5%, can you kind of call out anything on the increase over what would be normally in that $15 million?

Debra Cafaro

Yes. I mean, if there's – there's just normal sort of Ventas G&A. It's nothing out of the ordinary.

Bryan Sekino – Barclays Capital

Okay. So this is a good run rate going forward?

Debra Cafaro

We do think and our guidance assumes that there's a consistent run rate, yes.

Bryan Sekino – Barclays Capital

Okay. Great. And then, can you just give us a bit of an indication on how the occupancy trended year-over-year in the Lillibridge MOBs?

Ray Lewis

I would say that it's been pretty consistent, pretty flat.

Debra Cafaro

Yeah. And again, the owned group of assets that we have, the 57 consolidated were at 94.4%, I think percent occupancy which, again, I think our thesis in combining with Lillibridge is really kind of right assets, on-campus, right hospitals– single and double A hospital systems. So we feel good about that.

Bryan Sekino - Barclays Capital

Okay. Thanks a lot.

Debra Cafaro

Thank you, Bryan.

Operator

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

Rob Mains – Morgan Keegan

Thanks. Good morning.

Debra Cafaro

Hey, Rob.

Rob Mains – Morgan Keegan

I will follow-up to Jerry's question on CapEx. In the supplemental, the table on page 17, that $6.2 million number, is that the one to use?

Debra Cafaro

That's correct.

Rob Mains – Morgan Keegan

Okay. And then I also want to clarify, the 3.5% management fee figure, you said that will be in the next – that's included in the full year guidance. Does that mean that there will be kind of a catch-up in the fourth quarter on that?

Ray Lewis

Yes.

Rob Mains – Morgan Keegan

Okay. So if we're going to model that going to 3.75% in 2011 we need to adjust down a little bit, the NOI that you'll have in Q4?

Ray Lewis

No. The 3.75% in 2011 will be paid as we go through 2011.

Rob Mains – Morgan Keegan

Right. I mean, if there's a catch-up in the fourth quarter this year, then I…

Ray Lewis

Whole new run rate.

Rob Mains – Morgan Keegan

Yes. You decrement it a little bit. Okay. And then last question on Sunrise and this resolves my last question. Clearly, it seems like things have – we're past the bottom there. I was looking back, I think the high water mark in occupancy since you've owned the portfolio is 93%. Do you happen to know where it's been historically and I assume there's no kind of structural and market impediments to returning to those levels eventually?

Debra Cafaro

I think the portfolio has been as high as 93%, – I know it's been at 93%. I think it's even been higher than that. Look, we have – these are great assets in great markets. They're really shining through. I think they're starting to shine through again, through the increases in occupancy and NOI that we're seeing and I – there's good reason to believe, as the economy grows and things return to some kind of normalcy, that these assets have every opportunity to get back to those levels over time. And the question is how quickly will that occur?

Ray Lewis

Rob, the high water mark in occupancy was in the third quarter of 2007 where we were at 93.3%. I would echo Debbie's comments and just point out further, we continue to invest capital in these buildings as we've described to maintain them, make sure that they're best-in-Class that they show well, they're well-located.

Sunrise is really turning their attention and focusing on operations in a way that's showing results. So we like the trajectory of the portfolio.

Rob Mains – Morgan Keegan

Okay. Great. That's all I had. Thank you.

Debra Cafaro

Thanks for joining, Rob.

Operator

Your next question comes from the line of Tayo Okusanya with Jefferies & Company. Please proceed.

Tayo Okusanya – Jefferies & Company

Hi, guys. Good morning, Debbie, Ray and the whole crew. Just two quick questions, one big one and one small one. Debbie, about a year ago I asked you the question about what your goals were over the next 12 months and what basically kept you up at night and you mentioned you wanted to build more of an MOB platform. I think we can put a check on that.

And then you also mentioned to us that you wanted to build more potential sources of revenue generation. And I think with some of the deals you've done we can put a check on that. So I'm going to say, as you look into your crystal ball, I want to ask you that same question of over the next 12 months, what would you like to accomplish with the company and what keeps you up at up at night?

Debra Cafaro

Tayo, I'm really surprised at those answers because my normal answer on what we think about every day is our goal is to create extraordinary value for shareholders. So I guess I must have gone down one layer of the onion to identify the MOB and the revenue generators. And as we sit here today, you're right. We have made a lot of headway, checking those things off the box – off our list.

I think right now, again, we're very focused on closing the Atria acquisition, closing the Sunrise acquisition and continuing to make sure we have the right team to make good decisions, to continue to grow the portfolio and to manage risk and that's what we always do and then in terms of staying up at night, honestly, we are so exhausted that nothing is keeping us up, so – So I hope that answers your question.

Tayo Okusanya – Jefferies & Company

That's helpful. And then second question on the MOB side of the equation, just talk a little bit just if you're seeing any real differentiation in regards to how different markets are performing, especially in regards to rent rolls, rental rates and tenant retention rates.

Ray Lewis

Yeah. Tayo, across the portfolio things are performing great, our stabilized occupancy is over 94% which relative to any of the other reported numbers looks pretty good. I think you have different performance in different markets. There are certainly some markets that are stronger than others.

But what we've tried to do with our portfolio is align ourselves with the best healthcare systems in each market, buy on-campus real estate with those healthcare systems so that we're well-positioned to maintain those above market occupancies and are positioned for the future.

Tayo Okusanya – Jefferies & Company

Can you make any generalization about the markets like East Coast is stronger than the West Coast or East Coast is stronger than the Southeast?

Debra Cafaro

We're going to ask Todd to take that one.

Todd Lillibridge

I think what we've seen is some of the major markets where as you could expect competition would be greater, so some of, again, the primary markets around the country if there's a potential for softening, that would be where it would come. But as Ray said, I think what's more important is really the health systems, the notion that the assets are on-campus

We're dealing with diversified providers with a broad spectrum of service line. We're seeing a lot of growth in orthopedics and cardiovascular services and oncology and, having on-campus facilities that's where we're going to see and are seeing the growth in our portfolio.

Tayo Okusanya – Jefferies & Company

That's helpful. Thank you.

Debra Cafaro

Thank you. Okay. I think there are no further questions so I want to thank everyone for joining us today and we, as always, sincerely appreciate everyone's support of Ventas.

You can know that the management team here will continue focusing on creating value for all of our stakeholders. We're hoping to see everyone when we get together in New York later this month to celebrate the 50th anniversary of REITs and we hope you have a great weekend. Thank you.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a great day.

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