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Ventas (NYSE:VTR)

Q1 2011 Earnings Call

May 05, 2011 10:00 am ET

Executives

Raymond Lewis - President

David Smith - SVP and CFO

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

Richard Schweinhart - Chief Financial Officer and Executive Vice President

Analysts

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Jeffrey Spector - BofA Merrill Lynch

Jonathan Habermann - Goldman Sachs Group Inc.

Karin Ford - KeyBanc Capital Markets Inc.

Robert Mains - Morgan Keegan & Company, Inc.

Thomas Truxillo - BofA Merrill Lynch

Richard Anderson - BMO Capital Markets U.S.

James Milam - Sandler O'Neill + Partners, L.P.

Bryan Sekino - Barclays Capital

Michael Bilerman - Citigroup Inc

Question-and-Answer Session

Debra Cafaro

Yes. I mean I always think -- and then I'm the biased advocate, I'll be the first to admit that, that we should be rated about 2 notches above where we always are rated. So you have to take my response with a little bit of a grain of salt. But I think Ventas really should be and is frankly sort of like a BBB+ quality, credit quality company. And I think the bondholders acknowledge that in the way that we tend to price our paper very -- with great spreads. And so the bondholders I think really appreciate what a reliable credit we are and have been and how we've managed the company for the benefit of all of our constituents over time, and they know that. And so I would look really towards getting to that BBB+ rated level whether we can persuade those with the pen of that. I'll let you to decide, but we're bullish on our credit anyway.

Operator

Your next question comes from the line of Jay Habermann with Goldman Sachs.

Jonathan Habermann - Goldman Sachs Group Inc.

Debbie, on the question on acquisitions. Can you just give us some sense as to where you see values today whether they're fair or perhaps a little bit pricey? And as you think about whether it's senior housing or perhaps life sciences or MOBs, but just trying to get some sense of how you think about valuation, whether you're looking for a little bit of a pullback over time to perhaps deploy capital as you've talked about?

Debra Cafaro

I think we have always averaged into our investments over time. And I think that we -- let's take seniors housing as an example. I mean I've seen on my soapbox a I little bit about this. But here you have high-quality infill locations and assets that have shown tremendous resilience. They're need-based, they're demographically driven, major metro location. And the Atria ones, for example, we're buying at let's call it a 6.5% cap on the stabilized assets. And to me those should trade at something like multi-family cap rates. And so I think that those assets, I mean, are well-priced and that's why we're buying them. And I think the market has come to appreciate the resiliency of the cash flows and the potential for growth in those cash flows. So it really varies by sector. And I think as Brian mentioned, as you look forward at skilled nursing, we don't really know what the pricing will be in this kind of period of uncertainty but those may be attractive pricing as well. And the other asset types I would say generally are in kind of the fair range, let's call it. So that's how we see it.

Jonathan Habermann - Goldman Sachs Group Inc.

Helpful. And also just following up on the CMS proposal, I mean do you think that 2012 is a starting point i.e. this could go further in out-years as well or do you think that 2012 is really what they're looking at, and then that's where they stop?

Debra Cafaro

Yes, I mean, look, we have lived the sort of nursing home CMS story consistently over the last -- since I got here in 1999. And the truth of the matter is as the guys who cover healthcare as opposed to real estate know, there are constant kind of ebbs and flows in Medicare reimbursement. And I think we've been in a flow. And now I think on skilled nursing as distinct from hospitals, which -- our L-tax [ph] just got on an increase in Medicare reimbursement. I think we're in a period of a little bit of ebb, and we have been talking about that where we think there will be some cost pressures on the operators that will reduce the rate of growth in reimbursements or even some reduction. And this is something that we've been through over time and they tend to go in fairly predictable cycles. And so we think it's likely to be sort of a multi-year period where there is margin compression at the operators. We don't think it's going to be drastic in any way. But there will be these cost containment measures that come from both the budget issues in Washington as well as just the idea that CMS maybe got a little ahead of itself with RUG-IV. And that's part of the ordinary ebb and flow of the business. And that's why again it's important to be the landlord with operators who have the ability to manage through these changes, which occur every single year and have the kind of coverage that we have.

So I don't -- operator, I don't think we have anymore questions. And so I want to thank everyone for participating in this quarter's call. We very much appreciate your attention and your support, and we look forward to seeing everyone in June in New York. So thank you very much.

Operator

Ladies and gentlemen, that concludes today's presentation. All parties may now disconnect. Good day.

Operator

Good day, ladies and gentlemen, and welcome to the Ventas First Quarter 2011 Earnings Conference Call. My name is Maria, and I will be your operator today. [Operator Instructions] I would now like to turn the conference over to Mr. David Smith, Manager, Investor Relations & Capital Markets. 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 March 31, 2011.

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, 2010, 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 participants, and welcome to our first quarter 2011 earnings call.

Today, I'll provide a brief recap of the quarter and discuss our pending transactions and strategy. Our President, Ray Lewis, will provide an overview of our portfolio performance and investment outlook; and our CFO Rick Schweinhart will end our prepared remarks with a detailed review of our quarterly financial results. After that, we'll be delighted to take your questions.

Ventas had exciting and productive first quarter with normalized FFO per share, up 12% year-over-year, good growth in occupancy and NOI in our private pay Sunrise-managed communities and cash flow from operations, up over 13% from our diversified portfolio of senior living, hospital and skilled nursing assets. Most importantly, during the quarter, we announced our highly strategic $7.4 billion acquisition of Nationwide Health Property, a well-respected, diversified healthcare REIT with a successful 25-year history. We expect the NHP acquisition to be immediately accretive to 2011 earnings per share, and we continue to expect a third quarter 2011 closing.

Separately, NHP announced earlier today excellent quarterly earnings and $600 million in year-to-date acquisition volume at a blended initial cash yield of 8%. We are working hand-in-glove with our colleagues at NHP to run through the finish line and execute on our strategic vision of creating the leading diversified healthcare REIT that will continue to deliver superior value for shareholders. NHP CEO, Doug Pasquale, and his team are doing an incredible job working for our collective constituents.

As an update on our pending $3.1 billion acquisition of 118 high-quality private pay senior living communities operated by Atria Senior Living Group, we expect to close that transaction shortly. Atria is the fourth largest operator of assisted living in the U.S., and our acquired assets are located principally in attractive barrier-to-entry coastal markets with affluent demographics. The Atria assets continue to perform well, and we look forward to integrating these exceptional properties into our portfolio and working with the dedicated and experienced Atria's senior management team.

We are enthusiastic about our strategy and our positioning for the future. In just 3 quarters, since June 30, 2010, we have expanded and reshaped Ventas to deliver another decade of excellence for our shareholders. After our acquisition of the Lillibridge Medical Office Building business on July 1, 2010, and following completion of our pending Atria and NHP acquisitions, we will be a better, faster-growing and more reliable and diversified enterprise, with an enhanced cost of capital advantage and multiple avenues to exploit the $1 trillion fragmented universe of healthcare and senior housing real estate.

We continue as a management team to look forward and to try to stay one step ahead of the rapidly evolving external environment as we make decisions and allocate capital on your behalf.

I think it's worth taking a moment to explain what we expect Ventas to look like compared to just 3 quarters ago at June 30, 2010.

First, our private pay NOI will increase to 70% of our annualized NOI, significantly improved from 57% in mid-2010. During that period, we have systematically reduced our NOI from skilled nursing assets from 28% to 22%. Ventas will be the most diversified healthcare REIT by asset type, operating model, tenant and geography.

Kindred, the largest provider of post-acute care in the United States, will represent only 19% of our pro forma NOI. Seniors housing operating assets with Atria and Sunrise will comprise 26% of our business. And we will have a well-balanced portfolio with 29% seniors housing triple-net lease assets, 11% medical office buildings, 8% hospital triple-net leases and 22% post-acute triple-net leases.

NHP and Ventas are combining the 2 strongest balance sheets in the industry. Financial strength and flexibility preserve shareholder value and provide optionality for growth. We have already achieved momentum towards higher credit ratings from all three agencies, which should result in lower debt spreads. With over $6 billion in combined debt outstanding, improving debt cost should result in better earnings for Ventas shareholders.

With Atria and NHP, we will be doing business with the leaders of the healthcare and senior housing industry. The NHP acquisition will expand our customer relationship by 6x, providing Ventas with built-in opportunities to grow as our customers expand, monetize additional assets or consolidate.

Ventas will become one of the largest publicly traded REITs, with a pro forma enterprise value of $23 billion and the leading healthcare REIT by equity value. Compared to June 2010, our total enterprise value will have expanded from $10 billion to $23 billion. Moreover, we will be the largest owner of private pay seniors housing in the U.S., an asset class we find attractive due to compelling supply-demand fundamentals. The quality and location of our Sunrise and Atria operating portfolios are second to none.

With our Lillibridge transaction in July of 2010, Ventas acquired a national leading integrated platform in MOB. Now with the addition of NHP's MOB business, we will own or manage 14 million square feet of MOBs nationally; enjoy relationships with high-quality healthcare and hospital systems across the country; and succeed to NHP's attractive, exclusive $1-plus billion pipeline with excellent developer, Pacific Medical Buildings.

Ventas and NHP both enjoy excellent dividend coverage and the combined company has the potential to offer superior dividend growth and reliability to our shareholders.

And finally, with our improved size, deal, diversification and relationships, including NHP's strong regional investment business and deal team, and Ventas' expertise in completing large highly structured transactions with national operators, we will be positioned to do any deal, large or small, operating or triple-net, in any subsector of healthcare and senior housing real estate. All of these attributes should drive our future growth and total return.

We have always believed that the way to create shareholder value is by growing cash flows from a productive and diversified portfolio of high-quality senior housing and healthcare assets, operated by excellent tenants and managers, while we also prudently manage risks. All of our acquisitions over the years, 7 in 7 years, including Atria and NHP, fits squarely within that framework.

We look forward to completing and realizing on the power and the potential of our 2 pending acquisitions with the benefits of our shareholders. Ray?

Raymond Lewis

Thank you, Debbie. Ventas' portfolio currently consists of over 600 diversified and productive healthcare and seniors housing assets that produce reliable and growing cash flows.

During the first quarter of 2011, same-store NOI for our total portfolio grew 3.7% over the first quarter of the 2010. Starting with our long-term triple-net lease portfolio, where we derived 68% of our first quarter NOI, cash flow coverages remain stable at 1.7x through the fourth quarter of 2010, the latest date available. The triple-net lease asset in our portfolio are structured as pooled, multi-facility master leases, have a weighted average remaining lease term of about 6 years and encompass both seniors housing and post-acute asset classes. These leases have strong tenant credit and contractual growth escalations that continue to provide Ventas with steady and reliable cash flow growth year-after-year.

Same-store cash NOI on the 392 assets in our triple-net lease portfolio grew 2.7% year-over-year and remained on track to exceed our 2011 same-store growth projection of 2.5%. The majority of Ventas' post-acute assets are leased to our long-standing and successful tenant, Kindred Healthcare, which currently represents 36% of the company's annualized NOI. Our Kindred portfolio has an excellent quality mix of 71% and maintain strong cash flow-to-rent coverage of 2x for the fourth quarter of 2010, the most recent available.

The contractual rent escalations in our pooled, multi-facility master leases with Kindred delivered a net rent increase of 2.6% on May 1. Corporately, Kindred continues to be the leader in the post-acute space bolstered by its recent $1.3 billion acquisition of publicly traded RehabCare. Moreover, Kindred has a strong credit profile. Pro forma for the RehabCare transaction, Kindred has an attractive balance sheet at 4.7x adjusted debt to EBITDA, a diversified business mix spanning the post-acute continuum and over 2x EBITDAR to rent coverage.

Next, I would like to discuss our Seniors Housing Operating portfolio, which includes 79 high-quality private pay, mansion-style assisted-living communities managed by Sunrise Senior Living. This portfolio currently accounts for 21% of Ventas' first quarter NOI. Occupancy in the Sunrise portfolio was up 140 basis points year-over-year to 89.7%, which compares favorably to the 90 basis points year-over-year increase reported for assisted living by net in the first quarter of 2011.

Current occupancy in the portfolio is hovering at 90%. NOI for our Sunrise portfolio increased 7.3% over the first quarter of 2010 to $36.3 million. Our Sunrise NOI benefited from the previously mentioned 140 basis point increase in occupancy, a 3.1% increase in average daily rate and lower management fees payable to Sunrise, offset by higher expenses. Our 3.1% year-over-year rate growth compares favorably to the 0% year-over-year assisted-living rate growth reported by the NIC for the first quarter of 2011.

This quarter, our Steeles property in Toronto joined the stabilized portfolio from the lease up portfolio, as it continue to perform exceptionally well with current occupancy over 98%. We are also reaffirming our NOI guidance range of $152 million to $157 million for our Sunrise portfolio, which equates to a 3.5% year-over-year growth over normalized 2010 Sunrise NOI at the midpoint. Corporately, Sunrise has made strong progress during the first quarter by entering into a new revolving credit facility, raising capital through the sale of convertible notes and building its asset bass with a purchase out its majority partners interest in 44 of its senior living communities.

Turning to Medical Office. Our portfolio of owned and managed medical office buildings is comprised of 160 properties with 9 million square feet. Our MOBs are 90% on-campus and affiliated with investment-grade health systems. Medical office buildings currently account for 9% of the company's annualized NOI. The Lillibridge platform, which we acquired at the beginning of third quarter of 2010, continues to deliver steady performance in our own portfolios. Our consolidated same-store stabilized pool of 58 MOBs maintained strong occupancy, above 94%, and provided first quarter NOI of $12.7 million, consistent with the fourth quarter of 2010.

Also, during the first quarter, Lillibridge rolled out a new branding initiative aimed at showcasing the combined benefits of our two firms: Ventas' strong balance sheet, access to capital and investment team; and Lillibridge's brand, full-service capabilities and performance track record with highly rated hospitals and health systems.

Finally, it is worth noting that Ventas' MOB presence will grow significantly upon the closing of the NHP acquisition, as our combined owned and managed portfolio will encompass over 230 medical office buildings containing 14 million square feet. We will also have relationships with over 50 not-for-profit and investor-owned hospitals. From a fit standpoint, NHP's Pacific Medical Buildings platform focused on the West Coast complements Ventas' Central and Eastern U.S. focus very well and will provide Ventas with coast-to-coast MOB market coverage that will be able to provide full-service real estate capabilities to hospitals and health systems nationwide.

Before turning the call over to Rick, let me just touch briefly on acquisitions and investment environment, which continues to be robust and attractive for both Ventas and NHP.

Obviously, Ventas has been active in the large deals space with the announcements of Atria and NHP. Likewise, NHP has been productive in the small and medium-sized deals space having closed nearly $600 million in new investments so far this year. These transactions run the gamut from seniors housing to skilled nursing to medical office, deals include both follow-on investments with existing relationships, as well as new relationships with good local and regional operators.

Moreover, a number of these transactions were off-market deals that were identified by NHP's network of regional originators and priced at attractive yields, averaging 8%. So with $600 million closed so far, another $170 million under contract, an active pipeline, a strong originations team, NHP seems well positioned to exceed historical origination levels in 2011.

Deal flow in the market remained strong as private equity and other owners of healthcare real estates seek liquidity to recapitalize their balance sheets and grow their companies. At the same time, capital alternatives for those with liquidity and growth needs are still relatively limited, with secured debt being underwritten to very conservative standards. Ventas continues to have access to multiple capital markets on attractive terms. As a consequence, we are seeing a steady flow of attractive investment opportunities both large and small in all of our asset classes. And through the combination of NHP's excellent regional acquisitions platform, Ventas' large transaction capabilities, our track record, extensive relationships with leading operators and our attractive cost of capital, we should be exceptionally well-positioned to continue to grow our company.

With that, I will turn the call over to Rich Schweinhart to discuss our financial results.

Richard Schweinhart

Thank you, Ray. First quarter 2011 normalized FFO was $0.75 per share, per diluted share, an increase of 12% compared to the first quarter 2010, per share results end up $0.67. Normalized FFO was $121 million compared to last year's first quarter of $105.2 million. Normalized FFO in the first quarter excludes $20 million composed primarily of merger-related expenses and deal costs totaling $6.4 million in the quarter, a loss on extinguishment of debt of $16.5 million, offset by a $3.2 million income tax benefit. First quarter normalized FFO increased from last year's first quarter due to NOI increases in all three of our segments: triple-net, seniors housing operating and medical office buildings.

Triple-net lease revenues grew to $118.6 million from $116.3 million last year, primarily due to contractual escalations. Seniors housing operating NOI increased 7% to $36.3 million this quarter from $33.8 million last year. In addition, during the quarter, we received proceeds from repayment of loans receivable and sales of marketable debt securities totaling $43 million and recognized income of $2.5 million.

Due to the Lillibridge acquisition on July 1 of 2010, first quarter Medical Office Property group NOI grew to $18.4 million from $8 million last year, including $1.4 million in unconsolidated joint ventures. Finally, first quarter normalized FFO also benefited from our fourth quarter acquisition of Sunrise's non-controlling interest in our 58 of our 79 senior housing communities for an equity investment of $41.5 million. This purchase added approximately $2 million to our earnings in the first quarter compared to the first quarter last year.

Looking at sequential results. Fourth quarter 2010 FFO totaled $121.4 million compared to this quarter's $121.0 million. The principal reason for stable sequential performance relates to our deal with Sunrise completed at the end of last year. That deal included a modification of our management agreements with respect to all 79 communities managed by Sunrise. The modifications included a reduction in the 2010 management fee to 3.5% for the period April 1 through December 31, 2010. The modification also limited certain annual shared cost charged to the communities. The savings reflected on our fourth quarter results totaled $7.2 million. However, $5 million of that savings was attributable to prior quarters in 2010. 2011, Sunrise management fees were set at 3.75%.

As a result, in the fourth quarter 2010, Sunrise managed NOI was $42.6 million. Excluding the $5 million out-of-period cost savings and accounting for 2 more days in the fourth quarter, the comparable Sunrise fourth quarter NOI would have been $36.8 million, consistent with the first quarter NOI of $36.3 million.

Sequentially, Medical Office NOI in the first quarter of 2011 was $18.4 million, also stable compared to the fourth quarter segment results. Interest expense improved by almost $3 million in the first quarter compared to the fourth quarter. Also due to the late fourth quarter acquisition of Sunrise's minority real estate interest in 58 of our communities, FFO improved by approximately $2 million, sequentially.

We continue to focus on maintaining a strong balance sheet and increasing cash flows from operations. At March 31, our cash balance was $42 million and we had $8 million outstanding on our $1 billion revolving credit facility or net liquidity exceeding $1 billion. In the quarter, we issued 5.6 million shares of equity for $300 million, used those funds to prepay mortgage debt of $307 million. This capital activity is consistent with our announced funding strategy for the Atria acquisition of reducing secured debt and improving our credit profile. As a result our credit stats improved to outstanding levels at March 31. Net debt to adjusted pro forma EBITDA is at 3.8x, and our fixed charge coverage ratio substantially exceeds 3x.

Our March 31, 2011, debt-to-enterprise value is an industry-leading 23%. Weighted average shares outstanding in the quarter at 162 million shares increased 3.2% over the first quarter of last year and 2.4% over the 158.2 million in fourth quarter 2010. We are affirming our 2011 normalized FFO per diluted share guidance at $3.06 to $3.14.

At the midpoint, this represents 7.5% growth versus 2010 and is the result of expected improving property operations at Sunrise and our pending Atria acquisition. Normalized FFO per share guidance includes the acquisition of Atria Senior Living, but does not include the acquisition of Nationwide Health Properties or unannounced acquisition or divestiture activity, deal costs, capital transactions, losses on extinguishment of debt, FX gains and losses, non-cash mark-to-market derivative income and expense, non-cash income tax expense or benefit or litigation expense or proceeds.

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

Operator

[Operator Instructions] Your first question comes from the line of Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc

Just a question on the NHP deal. Clearly with having completed almost $800 million year-to-date, that's clearly in excess of what the run rate they've been on and I think probably ahead of where they thought they would be. What's happening in terms of approving deals, and I would've thought in the first quarter with all the stuff on the merger that the time probably would have been in reverse. They wouldn't have been able to do as many deals. So I'm just wondering if there's been a change at all in terms of how those deals are being sourced or what's closing or what's being approved. And ideally then, given the higher acquisition volume, that ideally should lead to better underlying FFO in which case the deal probably is going to be more accretive at least in the near term and essentially going forward if this pipeline grows even further.

Raymond Lewis

So Michael, I'll take the first part of that question. I think with respect to moving transactions through the pipeline, NHP is continuing to run their business. You'll recall when we announced the transaction that one of the primary benefits we described was the value of the regional originations platform in the pipeline if they're able to generate. And we've been laser-focused on making sure that we don't lose any traction on that and that we -- when we close the transaction, we are running at a full gallop with the originations platform. So John Cobb, our Chief Investment Officer, has been working hand-in-glove with the originations team to make share that we are tracking the transactions that they're running, that we are on board with the way that they are underwriting and evaluating them and that they're moving quickly through the pipe and that there aren't any bottlenecks. So we have been extremely focused on that aspect of the transaction.

Michael Bilerman - Citigroup Inc

And I assume then from the perspective of accretion for the deal, I don't think you guys were probably underwriting $800 million so early in the year out of the NHP platform just given how conservative you are in underwriting. I guess this issue would mean that once the deal closes, it's probably a little bit upsize given the fixed exchange ratio in the transaction.

Debra Cafaro

Well, Michael, as you know we are super excited about the transaction, and we really think it gives us more ways to grow in the future. And we are maniacal underwriters as Doug eloquently explained at your conference. We said when we announced the deal, there were about 250 closed and another 250 or so in the hopper on acquisitions. And we give NHP a ton of credit for continuing to really drive their business. Again, working very closely with them since the date of the announcement, and even before, so that we capture and realize on the potential of the acquisition. So we hope to continue doing that, and we're just all about executing right now.

Michael Bilerman - Citigroup Inc

Second question is on the Atria. You maintained this $186 million to $196 million sort of NOI level, and part of that wide range originally was due to you didn't know when the deal would close during the year. My impression was that the senior housing fundamentals are better from when you announced the transaction, in which case the NOI level for the full year would likely be higher today than when you did the transaction. And so I'm just wondering if you can sort of go through a little bit about sort of NOI for 2011 as a whole for Atria, and then what you'll pick up as your share. And then also how you're feeling about Lazard's holding in the company, clearly which the HCP trade and Carlisle with having bought them out, they weren't really going to be a long-term holder, but I'm just curious how that -- whether that's giving you a thought about having a large stakeholder in the company and perhaps viewed as an overhang and that?

Debra Cafaro

Okay. Well, there's a couple, maybe three questions in there and I'll take them seriatim. One is that we do love the fundamentals in seniors housing, especially the Atria assets, which are in these terrific locations like New York and the West Coast. And when we gave our guidance range of $186 million to $196 million, I think we were building in a significant amount of growth in the year-over-year asset performance, which we are seeing actual performance in line with that. So the senior housing market is really performing kind of as we expected, and we did give high growth rates year-over-year for Atria as you remember. And that's really already baked into $186 million to $196 million. And so we feel very comfortable with the range that we've provided. And so the good news is I think the portfolio is performing well and in line with I would say pretty robust expectations of year-over-year growth, so we feel good about that. In terms of our new partner, Lazard, what I think is really outstanding about the deal structure that we struck with Lazard is that it has evidenced Lazard's partnership with us and their confidence in their own assets, in Ventas and in our prospects. And so -- and it's also very balance sheet-friendly and takes a lot of risks off the table for Ventas shareholders in terms of deal structuring. So we -- Matt [Matthew Lustig] has been and Lazard has been a good corporate shareholder in circumstances where they have taken REIT takes in the past. I mean that's been a handful of situations. And I'm confident that they will do the same here with Ventas.

Operator

Your next question comes from the line of Jeff Spector with Bank of America.

Jeffrey Spector - BofA Merrill Lynch

Debbie, in your opening remarks, you commented that you'll be the largest platform and you talked about you could do acquisitions in each sub-sector. I guess how should we be thinking about that in terms of the right portfolio mix, your strategy going forward?

Debra Cafaro

Okay. We have always believed that the way to create value, again, is to grow earnings and to diversify our portfolio and have good balance in the portfolio. And so as we close everything that we have pending, we're going to have a little bit over 25% in senior housing operating and a very good balance throughout the rest of the portfolio, with 70% coming from private pay sources. I think the beauty of the model that we're developing with these acquisitions is that we will be able to respond to market opportunities and really expand or contract these pieces of the pie as we see market opportunities developing. We certainly can do more seniors housing operating. We have set up our deal with Atria to really grow with them. We could do more with Sunrise potentially in that higher gross operating model. And really we have -- we've got our MOB platform now that we can grow. And then frankly, our -- so any way we want to go with the portfolio now, I think we have every opportunity to do so, including, by the way, attacking very large opportunities that will not overweight the portfolio in terms of concentration if those kind of large opportunities present themselves. So we really are excited again about the kind of company that we're going to be, the cost of capital and our ability to really seize the opportunities in the market, which will kind of ebb and flow over time.

Jeffrey Spector - BofA Merrill Lynch

Okay, thank you. And you also commented on being able to deliver superior dividend growth and, of course, that's been a key theme in the market today. Could you quantify that? Have you done any sort of sensitivity analysis over the next few years, what you think you could do?

Debra Cafaro

Well, I mean Ventas historically has both one of the highest dividend growth rates, if not the highest in our sector, coupled with a very low payout ratio. And so the combination of our ability to grow earnings and having a low payout ratio means that we should continue to have upward momentum in our dividend. And just to put it in historical context, Ventas has grown our dividend about 8% annually from '04 to '07 and again still has the lowest payout ratio in the sector. So that is a, I think, underappreciated investment attribute of Ventas securities and, of course, NHP also has a low payout ratio. So we're combining sort of the best balance sheet, the best dividend coverage, and I think we can use both of those attributes to great effects as we go forward.

Jeffrey Spector - BofA Merrill Lynch

Okay. And then last question for Ray. Ray, you were commenting on the relationships you'll have in the MOB space nationwide. Can you just talk about that a little bit more and help us -- I guess, help me understand exactly how you can leverage those relationships nationwide?

Raymond Lewis

Right, Jeff. So as I said in my comments, Pacific Medical Buildings covers 11 western states, states that Lillibridge hasn't really established much, if any, of a footprint in so far. Now those are certainly states that we wanted to do business in. We're in the process of figuring out how to enter those markets. But with the acquisition of NHP, we get a pretty much ready-made presence and with the strongest brand in that market with their joint venture with Pacific Medical Buildings and the built-in pipeline that goes along with it. And Lillibridge has an excellent coverage of the Central U.S. and Eastern U.S. And so that creates sort of a nationwide capability within our combined companies to service -- full service any of the healthcare hospital systems across the country. So I mean, that's really the basic strategic thesis, and I think it's a very complimentary business model.

Operator

Your next question comes from the line of Karen Ford with KeyBanc.

Karin Ford - KeyBanc Capital Markets Inc.

Just wanted to ask a follow-up question on how Atria is performing. If my notes are correct, I think you expected the deal to close originally in April and you were looking for sort of a high single-digits NOI growth. And I think you said today that it's running roughly in line with your expectations. Would it be correct to say that it's closing a little bit later than perhaps you had expected but that's being offset by better expectations on the NOI side?

Raymond Lewis

I think the NOI performance is right in line with what our expectations were as Debbie said. I think we're looking at NOI increases year-over-year in the first quarter on the order of 10% or so. So again, in that high single-digits range, occupancy is up, rates are up. The redevelopment communities are performing well, I would say on track, and several of them performing well ahead of what we had forecasted. So as Debbie alluded to the NOI builds through the year, and so I think we're still very well within the range that we had projected even with the slight delay in the closing.

Karin Ford - KeyBanc Capital Markets Inc.

Great, thanks. Same question, just relates to the recent announcement by the CMS on the reimbursement changes potentially affecting skilled nursing. Can you just comment on what you think might be the effect on your skilled nursing portfolio and your 1.8x coverage there today?

Debra Cafaro

Happy to talk about that. Just for those of you who haven't heard, CMS has proposed of an A and a B reimbursement scheme for fiscal year '12 for the nursing homes, one of which is up over 1% and one of it -- one of which contains the potential reduction of about 11%. Couple important things to note. I mean we have very deliberately been positioning our portfolio to increase our private pay as we are in what we believe is a generally cyclical high in Medicare reimbursements for skilled nursing assets. And I think that's an important aspect of our strategy. Most of our sniffs are with Kindred who, as Ray mentioned, corporately has a very strong balance sheet and the corporate coverage of pro forma after the RehabCare acquisition is about 2x EBITDAR to rent at the corporate level. And so if there was any change in reimbursement for the skilled nursing portfolio, let's say in the 0% to 10% reduction range, we would still have fantastic corporate coverage of our Kindred leases and a 5% cut, frankly, just at nursing home level, changes coverage on the Kindred overall leases by, call it, 15 basis points, something like that. So we're in a great position. These are seasoned leases that Kindred's been growing EBITDAR in over a long period of time, really, since 2001. And so that's the beauty of really being in this protected position with a great tenant.

Raymond Lewis

And it's important to note that what Debbie is talking about there assumes no mitigation on the part of the operator. So those are just sort of the gross numbers.

Debra Cafaro

Yes, just a big whack off the top that falls to the bottom line, which, again, we're in a luxurious position of taking a wait-and-see approach towards the rule because we are in such a protected position with Kindred's success.

Operator

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

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

So a couple of things, just back at NHP. I was curious if, I guess one of 2 things, either you have a sense of how much say, $800 million of additional investments, I assume finance totally on the debt side, benefits sort of the implied return or alternatively, if we're going to try -- if you can't give me that number, I just want to ask some questions about how we should think about it.

Debra Cafaro

Okay. Well, again, Jerry, when we announced and underwrote the deal, we did assume that NHP did maybe $0.5 billion or so of acquisitions this year. They're ahead of that. We are assuming they're 100% debt-financed because again given the flexibility in both of our balance sheets, that's perfectly -- we still would have tremendous credit statistics. And our long-term cost to debt between the 2 companies for 10 years right now is probably about 5%, if that helps.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Okay, okay. And so when you gave out initial sort of yield numbers, I don't know if you did that specifically or not, you were assuming the $500 million, what -- how did you sort of think about the return on that investment when you started?

Debra Cafaro

I mean we assumed the blended rate would be between 8% and 8.5%, which is -- it's about 8%.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Okay, okay. And just on the CMS thing, just to follow up. So the NHP side of that, anything we should be worrying about on that side of the portfolio?

Raymond Lewis

No.

Debra Cafaro

No.

Raymond Lewis

No. Jerry, we did the same analysis on that side that we did on our own portfolio. Again, taking a big whack at the Medicare revenues across the board, if you were to hit them 10% or so, your DARM coverages -- EBITDARM coverages would be down about 15 basis points from the 2x roughly where they are right now, 2.25x where they are right now.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

I thought the NHP coverage was about 1.9%. Just what they just put out.

Raymond Lewis

Well on the EBITDARM side.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Okay, okay. Before management fee. Okay, okay. And just, Debbie, you had -- previously talked about doing acquisitions with Atria but I haven't really heard you put Sunrise so much in that same bucket before. When you talk about Sunrise, you come at buying out more maybe joint ventures that they have or are you talking about new acquisitions that they might be making

with you?

Debra Cafaro

Well, I think -- we think that Sunrise and Atria are fantastic high-quality operators, and we would be pleased to grow frankly with both of them on the senior housing operating side. And one of the benefits of the NHP acquisition is that it really creates capacity for us to continue to do so. And so I could see -- Mark [Mark Ordan] has -- Mark and Sunrise have been so successful at raising money and really turning the company around that they may not need us. They may do everything on balance sheet, but we would hope that if appropriate opportunities presented themselves, that we could potentially do some more business with Sunrise as well as Atria.

Raymond Lewis

And, Jerry, I just want to go back to that last question because I did misspeak. It would be 15 basis points on a 5% cut, 30 basis points on a 10% cut. So I just want to clarify that.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Okay, okay. Last thing, just on acquisitions. Are there new sectors that you might look at like life science and that sort of thing or when you talk about across the spectrum, thinking about the current buckets that you're in?

Raymond Lewis

We said all along, Jerry, I think that we're interested in continuing to grow and diversify our portfolio into new spaces and adjacent spaces where they make sense. The life sciences area is a great area. We're not invested in that right now. If we found the right platform opportunity or partnership opportunity with an experienced player in that space, it's definitely something we would pursue and be interested in. We think we've got a lot of runway in the areas that we're playing in right now. Certainly, the seniors housing space is growing and is still highly fragmented. Same with the medical office building space. So with our regional originations capabilities that are coming along with NHP and our large transactions capabilities, we've got plenty of growth opportunity in what we're doing right now. But if we can find the right opportunity in another space with the right partner or the right platform, we would absolutely look at it.

Operator

Your next question comes from the line of James Milam with Sandler O'Neill.

James Milam - Sandler O'Neill + Partners, L.P.

My first question, can you just talk a little bit as you approach the Atria closing, how you're thinking about the debt refis there. Are you still thinking about doing secured, to refi some of that secured debt, and what would be the timing be on something like that if that's what you did?

Debra Cafaro

Yes. I mean we've essentially pre-funded Atria other than a small amount of secured debt that we'll be paying off at the closing, which is maybe a couple hundred million dollars, and that really we would expect to put on our revolver in the near-term and ultimately again given -- depending on what the bond market looks like, we would consider taking out longer-term with the fixed rate paper. So we've done most of that work already with the $300 million that we paid down in early March, and there's a little bit more that we would expect to pay off at the closing.

James Milam - Sandler O'Neill + Partners, L.P.

So are you assuming some secured debt when that closes or you're...

Debra Cafaro

Yes, definite -- Yes, I'm sorry, we've announced -- there was originally about $1.3 billion of secured debt and we'll be paying down. We'll be assuming most of it and paying down a little bit of it.

James Milam - Sandler O'Neill + Partners, L.P.

Okay, thanks. My second question is on the MOB portfolio. The first thing, it looks like even though NOI was off the margin decline a little bit, I wondered if that is just -- if that's just sort of normal variance or if there was something else going on there? And then, also, could you give us a little color on the non-stabilized part of that portfolio and what you think as occupancy catches up that can contribute in terms of NOI?

Raymond Lewis

Well, with respect to the margin question, it's really -- we acquired 5 additional properties at the end of 2010. So this is the first quarter they're reflected which have gross leases which are lower margin properties, so that's really the bulk of the impact on the margin. And then with respect to the pre-stabilized assets, I'll let my colleague, Todd Lillibridge, talk a little bit about what we're seeing on the leasing front.

Todd Lillibridge

Yes, we -- on the leasing front, really, to take out the portfolio, both consolidated and -- consolidated first, we're still enjoying a robust occupancy on our stable consolidated, a little over 94%, and we see that continuing throughout the year. With respect to integrating in our lease ups, we're about 91%, headed towards about 92% for the year. With regard to our unconsolidated portfolio, we're about 85%. And actually, we're getting a fair amount of leasing in that portfolio as well. We have about 275,000-some-odd leasing activity for the first quarter, of about 70% of that are leases that have actually been signed or offered signature. So we see an uptick in the leasing activity here in the last 6 months, but we've also deployed a very aggressive leasing program that we launched at the end of last year. We're starting to see some of the fruits of that as we push forward. So we think we're going to see some pickup in our unconsolidated and our NOIs over the course of the year.

James Milam - Sandler O'Neill + Partners, L.P.

Okay. I guess my question, just looking at the supplemental, the non-stabilized consolidated MOBs for the first quarter, the occupancy, is that a 74%

on fixed assets?

Debra Cafaro

Yes.

James Milam - Sandler O'Neill + Partners, L.P.

Okay. Is that what, Todd, you were talking about or...

Todd Lillibridge

Yes, what do we have -- those are our 6 lease ups. And then we have our consolidateds with EBITDARM.

James Milam - Sandler O'Neill + Partners, L.P.

Okay, thank you. Just my last question quickly. Can you guys just give us a little guidance on the Medicare debt repayment? Is there a gain associated with that, that you're including in your guidance?

Debra Cafaro

I can do that. We were -- we had a first mortgage position in the Medicare debt of about $112 million. We were repaid on that in April. We will receive a gain on that in the second quarter, but all of that gain is essentially just moving what was already in our full year projections into the second quarter. So it was already in our projections sort of over the balance of the year, it will all be lumped into one quarter instead of the balance of the year. So that's just a timing difference.

Operator

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

Richard Anderson - BMO Capital Markets U.S.

First of all, I just want to know if someone's going to get Walter's bed or are you going to turning that into a memorial?

Debra Cafaro

Well, for those of you who don't know about Walter [Walter Breuning], we had the honor of having the world's oldest man and a very fine gentleman living in one of our communities in Montana. And he recently passed away after an incredible life. And so that was why they reported in the press, and we miss him. So...

Richard Anderson - BMO Capital Markets U.S.

It was a great story. I just didn't want it to go unnoticed...

Debra Cafaro

I agree. I agree. We should all have such a great life.

Richard Anderson - BMO Capital Markets U.S.

Now that I've loosened you up a little bit. I'm curious in terms of guidance why Atria is in there and NHP is not.

Debra Cafaro

Well, because we're going to up -- as we said when we announced the deal, we're going to update you on NHP guidance, and full company guidance, obviously, after we close Atria and as we get closer to the NHP closing, so we know more about timing and other puts and takes in the transaction. But we did announce what we think is 2-ish percent annualized accretion. And as we refine all of the projections, we will come out to you with the full company guidance on a total $23 billion enterprise kind of basis.

Richard Anderson - BMO Capital Markets U.S.

Okay. And reading through the background of the transaction, which was, as expected, a lot of back-and-forth, can you say if company A and company B, as they're described in the documentation, are restricted from getting re-involved in NHP because of the exclusivities that were involved?

Debra Cafaro

Well, what I can tell you is that we are -- it is interesting reading, we did very thorough diligence and NHP conducted a very robust process. And we're looking forward to closing the merger as soon as we can on the terms that we've announced.

Richard Anderson - BMO Capital Markets U.S.

Okay. Can I -- just turning to your pro forma 70% of the portfolio being private pay, can you define that for me? Did that include all of Medical Office, for example? How did you calculate 70%?

Debra Cafaro

Yes, and in fact, as we talked about before, Rich, if you really look through the portfolio, it's probably more than that. And I'll explain why. We calculated very simply, which is to say we take out the LPAC [ph] and we take out the skilled nursing NOI. Now as you know and I know, there is a significant portion of both LPAC and the post-acute underlying of EBITDAR that is also from kind of managed care and private pay sources. And if we included that as private pay, the 70% would actually go higher. But it's basically our whole portfolio minus sniffs in LPAC, which I think is a rough but fair way to present the private pay.

Raymond Lewis

And that will include the count for about 11% of that, Rich, just to sort of put a finer point on it.

Richard Anderson - BMO Capital Markets U.S.

Okay, thank you. And then my last question is on

the prospects for future transaction activity. I know, obviously, you and others have been very visible and very active. And understanding that you still have balance sheet room to continue the process of going out and looking for deals, can you comment on what may be viewed as the diminishing returns of getting bigger as an organization, and why not let the portfolio kind of grow from this level once you close NHP and Atria? And why you think getting you even bigger from that point may still be a reasonable direction to go?

Debra Cafaro

Well, I think -- a couple of reasons. There are times in the external environment and in a company's life where you are in the right quadrant to grow. I am a big believer in sort of looking forward to the external environment and as you know sort of hitting the balls that are thrown to you. And right now, I think there is a great confluence of factors that get Ventas in the right quadrant and give us a lot of opportunities to grow. And they start really with the fact that this is a very large fragmented market that's undergoing a lot of change. And it's a very dynamic market, a lot of consolidation. The -- and that generally creates opportunities. There is attractive access to get capital. As I mentioned, you know, if you can do a 10-year bond deal at 5%, that's historically very attractive capital. And it's our job to take advantage of opportunities when they present themselves to us and then change as and when market conditions change. And right now, we're in the quadrant where there are opportunities that will create value for share holders as we build the enterprise. And while that environment exists, it's our obligation, I would argue, to work as hard as we can for shareholders in that environment to get the best opportunities to build long-term value. And that's what we're doing, and that's why we're working so hard right now to move forward. Thank you.

Operator

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

Robert Mains - Morgan Keegan & Company, Inc.

Just kind of couple of Sunrise questions. First of all, occupancy declined sequentially Q4 to Q1. Should I just chalk that up to normal seasonal move-out activity?

Raymond Lewis

Yes, I think that's right, Rob.

Robert Mains - Morgan Keegan & Company, Inc.

Nothing unusually soft?

Raymond Lewis

No.

Debra Cafaro

I mean I think it's consistent with or better industry trends than as reported by now.

Robert Mains - Morgan Keegan & Company, Inc.

And then the other question, can you just remind, I forget this, Sunrise, is their pricings done on renewal or on January 1, typically?

Raymond Lewis

It's a mixture of both, Rob. So about 75% of the portfolio is on a annual basis in January and the balance is on the anniversary of the lease term.

Robert Mains - Morgan Keegan & Company, Inc.

Okay. So you had a nice bump I noticed in the ADR from Q4 to Q1. There all will still trickle higher, all things being equal through the rest of the year?

Raymond Lewis

Well, yes, I think due to a couple of things, one as the anniversary is renewed and then also to the extent that we have some markets where the properties are pretty full. We can start to hopefully push some street rates.

Operator

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

Bryan Sekino - Barclays Capital

I just wanted to get your thoughts, given your long relationship with the Kindred sniffs and the potential if these cuts from seeing us do go through for 12 and we get kind of passed this. There's sort of repricing from both Medicare and even Medicaid. Does this kind of provide you with an opportunity to kind of make some acquisitions maybe on a higher queue with this sniffs facilities? And if this would kind of change your view with sniffs going forward?

Debra Cafaro

That's an astute question I would say. We do believe that skilled nursing assets are good assets and particularly the kind of assets that Kindred and some other quality operators operate in the post-acute stage. So we've continued to say that sniffs are low-cost providers and with good operators and the right structure, the right pricing the right capital structure position, yet we're happy to be an owner. And I think that what we -- and this is partly based on our history as you say that goes back to the balanced budget act when we started with Kindred and we were 100% government-reimbursed asset, is that we tend to rightly or wrongly shy away from investing when we believe, again, rightly or wrongly, that you're at a cyclical high in reimbursement rates. And so as this new repricing and sort of resetting the bar comes about for good quality skilled nursing assets, we certainly would consider investing in them at the right price, right structure, right operator, et cetera, without losing our focus on continuing to have a diversified balanced portfolio.

Operator

Your next question comes from the line of Dan Cooney with KBW.

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

If we could just kind of go back to the Sunrise margins, it looks like they expanded about 80 basis points on a same-store basis. What would the margin change have been if you kind of adjusted to exclude the management fee structure change? I guess maybe a better way is if you kind of exclude management fees, what was maybe the increase in property level operating expenses?

Raymond Lewis

Dan, I think that margins would have been I think relatively flat with the exclusion of the management fees.

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Okay, great. And then just one more question, if you can maybe update us on your kind of longer-term plans for the Hearthstone portfolio, maybe just in terms of executing the right to terminate that lease? Just -- if there's any update there.

Raymond Lewis

No, Dan. We've been down in Houston meeting with Hearthstone, getting the lay of the land, understanding what the challenges and opportunities are in that portfolio. We want to be thoughtful about how we approach the situation and make sure that before we make any decisions about what we want to do with the portfolio, have a clear understanding of not only the challenges across the business level but at the asset level. And so we're doing a lot of work on that front right now. And I think any other thoughts or commentary would be premature. But we're assessing the situation. And it's a stable situation and now the question is how do we drive value through the portfolio.

Operator

Your next question comes from the line of Tom Truxillo with Bank of America Merrill Lynch.

Thomas Truxillo - BofA Merrill Lynch

Obviously, you guys have a lot of moving parts in your balance sheet right and I just have a few questions about some of those parts and in your financial policy in general. I appreciate the comments on refinancing some of that Atria secured debt and financing NHP acquisition with pipeline with debt as well. NHP also has some near-term maturities and borrowings under its credit facility. Can you talk about what your plans for that debt?

Debra Cafaro

Yes, I mean, look, here's -- I just want -- here's the key takeaway. The combination of Ventas, Atria and NHP is an incredible credit-positive for Ventas. It does -- and both Atria and NHP are being done in the most balance sheet-friendly fashion. And so we're more diversified. We have a terrific balance sheet, and we really don't have any sort of near-term funding risks. I think to your specific point, we would expect to do kind of debt-for-debt replacement on the NHP front, and they are very, very low leverage. They have virtually no secured debt whatsoever. So putting these 3 pieces together work beautifully. And on a pro forma basis with all 3 of them, the credit stats, which we've kind of published, are still the kind of credit stats that should get us an upgrade, which is again why I think the rating agencies have all indicated positive momentum toward improved ratings. And we'll be happy to talk you about the specifics off-line.

Thomas Truxillo - BofA Merrill Lynch

Okay, great. I appreciate the color. Just real quickly on the rating agencies and the upgrades. Given your increased scale and diversification that these acquisitions get you and that strong balance sheet, the strongest in the sector that you've talked about, do you have any sense of how high in that scale you could get and where you would want to be?

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