May 5, 2009
Executives
David J. Smith - Investor Relations Debra A.
Cafaro - Chairman, President and Chief Executive Officer Richard A. Schweinhart - Executive Vice President and Chief Financial Officer Raymond J.
Lewis - Executive Vice President and Chief Investment Officer
Analysts
Michael Bilerman - Citigroup David Toti – Citigroup Karin Ford - KeyBanc Capital Markets Jerry L. Doctrow - Stifel Nicolaus Bryan Sekino - Barclays Capital Richard C.
Anderson - BMO Capital Markets Tayo Okusanya - UBS David AuBuchon - Robert W. Baird & Co.
Robert M. Mains - Morgan Keegan & Co.
Jim Sullivan - Green Street Advisors
Operator
Good day ladies and gentlemen and welcome to the First Quarter 2009 Ventas Earnings Conference Call. My name is Kameesha and I will be your coordinator for today.
At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr.
David Smith. Please proceed
David J. Smith
Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2009. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws.
These projections, predictions and statements are based on management's current beliefs as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied.
We refer you to the company's reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2008 and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management.
The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com.
I will now turn the call over to Debra A. Cafaro, Chairman, President and CEO of the company.
Debra A. Cafaro
Thanks David. Good morning to all of our shareholders and our other participants and welcome to our first quarter 2009 earnings call.
My colleagues and I are joining me today from our Louisville office. I'm happy to report that things are good at Ventas.
Our safe, strong financial strategy is working. At 35% debt to enterprise value, four times debt to EBITDA and extended undrawn credit facilities and limited near-term maturities, Ventas is clearly in a great balance sheet and liquidity position.
We are committed to an improving investment grade credit profile. We are also pleased to announce that Kindred has extended the term for all 109 healthcare assets whose leases were maturing in 2010.
The leases for these skilled nursing facilities at long-term acute care hospitals will continue on existing contractual terms including escalation until 2015. This extension of over $127 million in annual cash rent demonstrates the quality and productivity of our diverse healthcare assets and the reliability of our cash flow.
And finally, we are reporting excellent first quarter earnings. Today, we will discuss those earnings, our numerous capital markets transactions, portfolio performance, recently proposed Medicare rules and our outlook for the balance of the year.
First, normalized FFO was $0.67 per share for the first quarter, flat with the year ago, which is an excellent result and slightly ahead of our expectations. It is also important to point out that at the corporate level, our first quarter 2009 cash flow from operations grew 7% and our normalized FFO increased 5% from the year ago period.
Turning to our capital markets activity. In February, we said that we would continue to execute an aggressive strategy of balance sheet management to stay ahead of the commercial real estate credit dislocation.
This approach requires that we: one, reduce already low leverage levels; two, opportunistically dispose of assets; three, extend debt maturities and four, demonstrate access to multiple capital markets. We have executed that strategy with a vengeance.
Over the last four months, we have raised over $1 billion from assets sales, our banks, the bond market and equity issuances. As a result, the company is clearly ahead (ph) within the REIT space, ready to weather a contracting economy and difficult credit market and also prepared to execute on investment opportunities when the time is right.
Here are the specifics of our capital raising activities. During the first quarter, we sold almost $100 million of assets at good valuations.
Next, we successfully extended and amended our unsecured credit facility, increasing current borrowing capacity and obtaining new commitments for about $600 million of revolving credit availability until 2012. Getting our banks to extend our borrowing capacity in such a constrained lending environment was a great outcome for Ventas and we thank our credit partners for supporting us.
Currently, we have virtually nothing drawn on these credit facilities. Finally, we raised $480 million through a concurrent issuance of equity and debt.
Both transactions were incredibly successful. Ventas is one of only two REITs that have accessed the unsecured bond market this year, and we did sell at a single-digit yield that no one thought possible.
Our equity offering went even better and we increased the size of the deal by 50% to $312 million in proceeds. In structuring our recapitalization, we prioritize balance sheet strength and liquidity; no question about it.
But we also thought hard about finding a sensible near-term use of proceeds to minimize the earnings impact from our increased equitization. So we used the proceeds of our offerings and sales to dramatically reduce near-term maturity.
Specifically, we paid off all of our 2009 bonds and bought back virtually all of our bonds due 2010 and more than half of our bonds due 2012 and 2014. We used the balance of proceeds to repay the outstanding balances on our line of credit.
As a result of all this activity, our combined 2009 and 2010 debt maturities totaled only $200 million. Our pro forma debt to total capitalization is excellent at 35%.
Our net debt to EBITDA is great at four times and our fixed charge coverage has propped to over three times for the first time in memory. In sum, so far this year we have done what we told you we would do.
We sold assets attractively, we successfully capped a highly constrained bank revolver market, we sold unsecured bonds at improbably low rates to extend our average debt maturity schedule and we issued equity into deep and broad demand. We also intend to use our high quality unencumbered pool of senior housing assets to complete a couple of hundred million dollars of attractive long-term Freddie or Fannie debt financings later this year.
Access to the very attractive GSE market for low-cost long-term fixed rate financing is a competitive advantage for Ventas as real estate debt markets continue to be challenged and capital remains scarce. Our strong financial position also gives us the luxury of committing capital during this difficult time to support our quality tenant operators when they have proven themselves to be good partners, when we believe the investment is a good deal for Ventas shareholders that should also have a disproportionately positive impact on our operator.
These criteria were met in the first quarter when we made a $19 million investment in Brookdale at a blended unlevered yield approximating 10%. That moves up into our portfolio review.
I will be quick as I review our diversified pool of triple-net lease assets first then our operating segments. Ventas's triple-net lease assets continue to perform well.
We received 77% of our NOI from our strong pool of multi-facility master leases with credit and structural support, downside protection and contractual escalations. Cash flow coverage across the entire portfolio, which includes our independent living, assisted living, skilled nursing and hospital assets through Q4 of 2008, the latest date available, was consistent with the prior quarter at 1.8 times.
Our Kindred portfolio, from which we received 41% of our NOI, continues to perform well with cash flow to rent coverages of 2.2 times. Notably, following a strong fourth quarter 2008, Kindred yesterday reported excellent first quarter 2009 results in each of its operating businesses.
And finally, our triple-net lease seniors housing assets also showed stable results through Q4 with cash flow to rent coverages remaining at 1.3 times. The takeaway from our triple-net lease portfolio is that in spite of the fourth quarter's economic freefall, our asset and care providers produced stable, solid results and Ventas' rents remain secure.
Our operating portfolio consists of 79 communities managed by Sunrise and 21 medical office buildings or MOBs. These operating assets provide us with granular, highly diversified revenue streams and account for 21% of our NOIs.
Our results for this portion of our portfolio are consistent with our guidance to you. With the 79 high-end private pay senior housing communities we own in North America that are managed by Sunrise, total community NOI for the first quarter was $30.5 million.
As you may recall, our forecast for total 2009 Sunrise NOI was 110 to $125 million. And first quarter results fell comfortably within this range.
Our full year NOI projection for the Sunrise communities remains unchanged. Average occupancy in our Sunrise communities for the quarter declined to 89% which was mitigated on the NOI line by strong cost controls and lower management fees at the communities.
And while the first quarter NOI annualizes towards the higher end of our NOI guidance range, spot occupancy at the end of March was closer to 87.5% in the stabilized communities. Although high acuity assisted living for seniors is a need-based business and new supply in the sector is very limited, we expect to see continued softness in occupancy and the use of promotional pricing as the recession continues through 2009.
This trend may dampness sequential quarterly results, although we did begin to see some signs that occupancy was stabilizing in the 87% neighborhood during the month of April. It is too early to say whether that level will hold, decrease or increase during the balance of the year.
We are not counting on a second half economic recovery, although we certainly would welcome one. And the Sunrise results will depend significantly on broader trends in the economy, the housing market, consumers' psychology and unemployment levels.
At the Sunrise corporate level, management continues to make progress on multiple fronts, including extension of its credit facilities until December and execution of additional forbearances with its mortgage lender. In our medical office building portfolio, we continue to like the reliable and consistent cash flow and high retention rates these assets provide.
NOIs from our MOBs was $5.4 million this quarter, up slightly from the fourth quarter. Moving to everyone's favorite topic, which is Medicare reimbursement.
Last Friday, CMS proposed fiscal year 2010 reimbursement rates for the skilled nursing facilities and long-term acute care hospitals. Overall, the proposals would result in stable to positive Medicare reimbursement levels for our Kindred portfolio.
With SNF rates down by 1.2% and LTAC rates up by 2.8%, the rule remains subject to comment by the care providers and may improve before it is finalized later this summer. Let me remind you that the ups and downs of SNF and LTAC Medicare reimbursement have acted as a favorable built-in hedge in our Kindred portfolio over the last 10 years, because reimbursement between the two asset types has been countercyclical.
Coupled with Kindred credit support and strong property level cash flow, this diversification between SNF and LTAC is an important and I believe undervalued strength of our Kindred portfolio in the master releases. As further evidence of the productivity of our Kindred assets, last week, Kindred renewed the term until 2015 for all 109 healthcare assets since leases were maturing in 2010.
These extensions are on existing contractual terms including escalation. Creating certainty around $127 million of annual cash rent for six more years is good for our stakeholders.
Kindred also agreed to purchase from Ventas six skilled nursing facilities with negative operating cash flow for a total consideration of $58 million or $75,000 per bed. Kindred has announced that it intends to resell these assets for 10 to $15 million.
This sale transaction will provide additional liquidity to Ventas, improve our portfolio quality and provide Kindred with a stronger platform and higher earnings per share. It is notable that Ventas and Kindred management continue to work together to create value for both sets of shareholders.
Finally, as most of you know, in March, Ventas was added to the S&P 500 index. Coming on my 10th anniversary at the company, this inclusion was great recognition for our team and all the hard work we have done on behalf of our stakeholders during the last decade.
It is wonderful that three healthcare REITs are now in the S&P 500. As a persistent and vocal advocate for healthcare to become the fifth major food group in real estate, I am excited to see our sector continue to gain momentum and recognition.
Thank you for staying with me during a long presentation. There was a lot of good news to communicate with you today.
I'll now turn the call over to Rich Schweinhart, our CFO for a detailed review of our financial results.
Richard A. Schweinhart
Thank you, Debbie. First, comparing the quarter to the first quarter last year, normalized FFO per diluted share was $0.67, stable with last year.
Normalized FFO was $95.7 million, up 5% from $91.5 million last year. Triple-net lease revenues grew to $116 million from $113.5 million, primarily due to contractual escalations.
Sunrise NOI was $30.5 million compared to $33.4 million last year. The reduction was principally due to the Canadian exchange rate, one fewer day in the first quarter this year versus last year and lower occupancy.
Medical office building NOI grew to $5.4 million from $3.4 million due to acquisitions. Interest income on loans and investments was $3.3 million compared to $0.5 million last year, all due to investments made in the last year.
Interest expense decreased to $46.6 million from $52.4 million last year, principally due to debt repayment. G&A increased to $10.6 million in the first quarter of 2009 from $8.3 million.
Weighted average shares outstanding increased to 143.1 million from 136.7 million. The share account increased due to our August 2008 equity offering.
Now, comparing the first quarter to the fourth quarter of 2008. Normalized FFO per diluted share increased a penny to $0.67.
Normalized FFO was $95.7 million, up 2% from $94.0 million last year. Triple-net lease revenues, medical office building NOI, interest income and average shares outstanding were all flat with the fourth quarter.
Sunrise NOI was 30.5 million compared to 32.2 million in the preceding quarter. The decrease was principally due to too fewer days in the quarter and lower occupancy, offset by an increase in the average daily rate to $170 from $167.
Expense control strengthened in the first quarter and we benefited from a reduced management fee of 5% of revenues. Interest expense improved significantly to 46.6 million from 51.2 million in the fourth quarter of 2008, due primarily to opportunistic debt repayment and purchases made in the fourth quarter.
G&A decreased slightly to $10.6 million in the first quarter of 2009 from $11.2 million last year. First quarter FAD per diluted share was $0.64, an increase of 5% sequentially.
Per share FAD was flat compared to the first quarter of 2008. On March 31, 2009, the company extended and amended its unsecured revolving credit facility from 2010 to 2012.
The facilities contain two portions. $590 million matures in 2012 and is currently priced at LIBOR plus 280 basis points and $277 million matures in 2010 and remains priced at LIBOR plus 75 basis points.
The blended rate is currently LIBOR plus 217. The entire facility carries a 20 bp debt facility and we will amortize the financing fees and expenses over the life of the facility.
In April 2009, the company issued 13.1 million shares of common stock and received gross proceeds of $312 million. We also issued unsecured senior notes due June 1, 2016, receiving gross proceeds of $169 million.
The notes have an effective yield to maturity of 9.6%. Proceeds from the senior notes and common stock offerings were used to purchase $306 million of our outstanding senior notes, which will result in forward interest savings of 7.5%.
We expect to report a $7 million loss on early extinguishment of debt in the second quarter. Consistent with our guidance, the loss will be excluded from normalized FFO.
The balance of our offering proceeds were used to pay down the revolver. At May 4, 2009, the company had $10 million outstanding under its credit facility, $58 million in cash and $853 million of undrawn availability.
The company's debt or total capitalization currently is 35%. Our net debt to pro forma EBITDA is 4.0 times.
As of May 4, 2009, the company has $35 million in total debt maturities remaining in 2009 and $171 million in total debt maturities in 2010, excluding normal periodic principal amortization payments. Taking into account our new credit facility, our April reequitization, our May bond repayments and tenders and our first quarter results, we are revising guidance for 2009 to between $2.48 to $2.58 from $2.55 to $2.65 per share.
From midpoint to midpoint of the guidance ranges, these factors combine to reduce our guidance less than 3% per share. To recap, we have focused on our balance sheet, which is strong.
We have excellent liquidity. Our first quarter normalized FFO per share was excellent and we look forward to continue the positive results for 2009.
Debra A. Cafaro
Operator, we'll be happy to open the floor to questions.
Operator
Thank you. (Operator Instructions).
And your first question comes from the line of David Toti from Citi. Please proceed.
Michael Bilerman - Citigroup
Good morning. It's Michael Bilerman here with David.
Debbie, I wanted to ask you, you talked a little bit about your balance sheet and how strong and a lot of the moves that you've made. And I think you mentioned the first time fixed charge has been north of three; debt to EBITDA of four times, which is significantly below both your peers and REITs overall.
Debt to gross asset value below 40%. All these key ratios highlighting into leverage.
As you think forward, because I think you've also talked a little about being optimistic in investing capital, how do you sort of see the balance sheet in terms of where you're willing to take leverage and think about how much capacity that gives you?
Debra Cafaro
Well, good morning Michael and team and thanks for joining. Right now, I think the focus really is on reducing aggregate leverage.
And as you point out, that does two important things for us. It will allow us to weather a dislocated credit market that may continue to persist.
And it will allow us to be opportunistic when we think we see something that makes sense for our company. It's too I think early to say right now how we're going to use that strength and.
It is -- we're not prepared to give the all clear in terms of the credit markets or the economy. So we're taking a wait and see approach.
But our overall view is that having this strength is going to benefit our stakeholders well because either way things go, we're going to be in a position to win.
Michael Bilerman - Citigroup
And that's fair. I guess if I am thinking more about long term is at some point, we will get an all clear.
And I am just trying to put goal posts around where you would take the balance sheet because unless you are talking that you are going to stay at these sort of levels even if you are going to go in and buy, you will always get the balance sheet at this level? Or is it we're willing to go, we're willing to take leverage to 50%, we are willing to take net debt to EBITDA from four to six times?
And obviously, when you do that, there is going to tremendous growth, and a lot of it will be debt fuel. So I'm just trying to figure out where your mindset is in terms of how you are going to manage the company once we do get an all clear.
Debra Cafaro
Well I mean you are right to say that we have a tremendous amount of capacity if we were to use that capacity to even get to meet our higher rated peers leverage levels. And again, that's very positive.
I think longer term, we may still want to get a better view where the credit markets are going and really what our stakeholders will be valuing before we put a stake in the ground and say, this where longer term we want our credit stats to be. I think we need to know more about the world around us and the environment before we're ready to say, we can use a billion of capacity, or whatever it may be.
So I hope you'll give us time to let the world around us evolve so that we'll be able to answer that question with better specificity as the year progresses.
David Toti – Citigroup
Great. Thanks Debbie.
This is David here. Can we go back to the issue of the 2010 reimbursement proposals from CMS and just quantify what your expectations are for the -- with the comment period?
Debra Cafaro
Well, what's going to happen, remember, the LTAC rate went up 2.8%, which is great. The SNF rates are proposed to go down 1.2% through a combination of adjustment.
And there is one adjustment that takes the rate up, which is a market basket increase, or inflationary increase, and then an adjustment that takes it down into negative territory. Last year, the care providers successfully persuaded CMS, which proposed the same downward adjustment last year to take it off the table because it isn't necessarily consistent with the idea of pushing patients to the lowest cost, most clinically appropriate setting.
So I think the operators will focus their attention again on removing that SNF negative adjustment, which then, if removed, would allow for a positive reimbursement rate for fiscal year 2010 for the SNF.
David Toti - Citigroup
Okay. And then could you quantify any impact to the hospitals as well?
Debra Cafaro
Well I think net-net, again, our tax flows on the Kindred portfolio are going to be sort of -- the EBITDAR should be the same or up from current levels on a blended basis.
David Toti - Citigroup
Okay. And then just thinking about some of comments that you made relative to partnering a little further with some of your operating tenants.
And you've obviously made some strides with Brookdale. Have you had any discussions with Sunrise in the same regard?
Raymond Lewis
Hi David, this is Ray Lewis. I think that, as Debbie said in her comments, we would consider doing a deal if we can get a good deal for our shareholders, putting out limited quantities of capital that will help and strengthen our partners.
And certainly, we have our minority interest with Sunrise and other contractual relationships. And if we can find a way to better ROI (ph) there and help Sunrise, that is something we would certainly consider.
David Toti - Citigroup
Okay. And then just lastly on the Brookdale line of credit investment, is that -- what was the discussion around?
That's a relatively small investment for you. Why not something larger in scale?
Debra Cafaro
Again, I mean we want to really be there with discrete amounts of capital to support our tenants. And to extent there, with the little gaps to fill, we felt very comfortable being supportive at that level for Brookdale.
David Toti - Citigroup
Okay, great. Thanks for all the detail.
Debra Cafaro
You're welcome, thank you.
Operator
And your next question comes from the line of Karin Ford from KeyBanc Capital. Please proceed.
Karin Ford - KeyBanc Capital Markets
Hi, good morning.
Debra Cafaro
Hi Karin.
Karin Ford - KeyBanc Capital Markets
Just wanted to follow up on David's question there with respect to Sunrise. When you guys would thing about potentially working and helping those guys out, would you consider potentially changing the terms on your management contract with them?
Debra Cafaro
Well, as Ray said, Karin, Sunrise has minority interest that we've already said might be an avenue for providing capital to Sunrise on a win-win basis. And we do have contractual arrangements with them.
And frankly, our contractual arrangements are fairly positive. We has a flat (ph) management fee that we're getting the benefit of now that allows the management fee to go down to 5% of revenues.
We have performance termination rights and cost controls and the management contract. So our contracts are pretty darn good.
All that said, those kinds of things could all go in the mix if we were to consider doing a transaction with Sunrise.
Karin Ford - KeyBanc Capital Markets
That's helpful, thanks. Second question is just regarding the dismissal of the counterclaim that HCP had filed against you in court that happened back in March.
Can you just discuss any changes to any of your accruals or your legal expenses or any change in strategy there after the dismissal?
Debra Cafaro
You broke up a little bit, but what I heard you say was that the HCP counterclaim in our litigation were dismissed in March. And what was the other -- the second part of the question, I'm sorry?
Karin Ford - KeyBanc Capital Markets
Yeah, just if that development changed anything with respect to your accruals in the lawsuit, your expected legal expenses or just anything different in your strategy with the trial coming up in August?
Debra Cafaro
Well it's all systems go in terms of really preparing (ph) for the trial, which is in Kentucky in August. And our strategy hasn't changed.
The aspect of the dismissal which is positive is that the jury at this point will only hear our case against HCP, and that will be all. So assuming that decision holds, that will all really focus the trial and probably would minimize the trial expenses.
Karin Ford - KeyBanc Capital Markets
That's helpful. Thank you very much.
Operator
And your next question comes from the line of Jerry Doctrow from Stifel Nicolaus. Please proceed.
Jerry Doctrow - Stifel Nicolaus
Thanks. I just wanted to get a little more color on a couple of items.
On Sunrise assets, obviously, there is a lot moving on in terms of Canadian currency adjustments and other sorts of things. Trying to just focus on same-store stabilized, it looks like things were just a little softer on occupancy, a little softer on margin.
So I want to just maybe get anymore color and see if that observation is right. And then I was wondering if you could talk about steel specifically since that's the big property left in lease up.
Debra Cafaro
Absolutely, Jerry.
Raymond Lewis
Sure. So, Jerry, as you look at the same-store stabilized portfolio, you'll see that occupancy was down slightly quarter-over-quarter from 90.7 to 89.1%.
I think this is consistent with our guidance and conversations on our last call where we talked about I think some continued softness as the economic recession plays out and bottoms through the rest of the year. I think we're pleased that Sunrise has gained traction in its cost controls and it's been able to mitigate the impact of some of that softness on the bottom line.
And we expect that they will continue to focus in that area and hopefully improve on the cost control through the balance of the year. With regard to steel, the lease up continues to go well at the community.
Again, I think if you look quarter-over-quarter, we've continued to make progress in that regard. The asset is now about 64% occupied and is generating positive cash flow.
And so it's generally moving in line with our expectations.
Jerry Doctrow - Stifel Nicolaus
Okay, that's helpful. And I guess the other thing I was just trying to sort of think through, a huge number of moving parts with the equity offerings and those sorts of things.
When you think about sort of your current guidance, sort of the $0.10 range, are there any big things, or what are maybe the big things that sort of move you within that? I am assuming -- we're assuming no acquisitions and that sort of stuff.
So was it just interest rates or what are the other variables we should be thinking about?
Debra Cafaro
Yeah, I mean the two big things, Jerry, really are Sunrise' results, which, if Sunrise trends more softly through the balance of the year, that's a big swing factor. And the other would be when we do the Freddie and Fannie deals, assuming that we do, we'll have to use of proceeds and how long it takes to deploy those proceeds.
So those have fairly significant clean items, clean factors within the $0.10 range.
Jerry Doctrow - Stifel Nicolaus
And just in terms of the redeployment of capital, I guess there is a little bit left on the line. But at this point, it could be new investments or it could just be further debt reductions or just --
Debra Cafaro
Right. I mean, we have thought about 200 million of mortgage debt that's due is 2009 and 2010.
And obviously, we've tried to be intelligent about our use of proceeds and we'll continue to do so. And if we do find any other attractive opportunities to invest, I mean we certainly would consider that.
So just back to your question, that use of proceeds is a big swing factor in the $0.10.
Jerry Doctrow - Stifel Nicolaus
Okay.
Debra Cafaro
Timing (ph), yes.
Jerry Doctrow - Stifel Nicolaus
And what's -- and the yield on the mortgages that are maturing?
Debra Cafaro
I mean to say they are in the sevens and eights.
Jerry Doctrow - Stifel Nicolaus
Okay. All right, thanks.
Debra Cafaro
Thank you.
Operator
And your next question comes from the line of Bryan Sekino from Barclays Capital. Please proceed.
Bryan Sekino - Barclays Capital
Hi, good morning. Just a couple of questions here.
Apologize if I missed it, but did you give the components of the new guidance and just wondering if the sale of the facility is part of that.
Debra Cafaro
The sale of the facilities did not have a major impact on the guidance.
Bryan Sekino - Barclays Capital
Okay. Okay.
And then if I could just move over to the Sunrise portfolio real quickly.
Debra Cafaro
Okay, good.
Bryan Sekino - Barclays Capital
With regards to you mentioned the stability and occupancy towards the end of the quarter. Just wanted to know what the trend is that's causing that.
Is it kind of like an increase in move outs or more move ins? Can you just flesh out a bit?
Raymond Lewis
This is Ray, Bryan. I think it's a little too early to tell what the trends would be.
I think when we looked at the numbers in April, we did see a consistent level of move ins, which is good. And the move out trends had abated somewhat.
But one month I think is a little difficult to draw any specific conclusions from.
Bryan Sekino - Barclays Capital
Okay. Okay.
And then the cost controls that you are starting to see in the Sunrise portfolio, what areas are you able to make headway there?
Raymond Lewis
So I think Sunrise has done a nice job in working on its variable labor. Earlier this year, they implemented a new variable standard, which was about a 25% decrease from the standard that they had in place last year on variable labor.
And they've been driving the communities to compliance with that new standard. I think other areas where we've seen them make some progress are in other controllables such as supplies and those sorts of things.
And then also, as Debbie mentioned in her comments, we've seen the benefit of having our management fee flex down.
Bryan Sekino - Barclays Capital
Okay. Thanks.
And then just one last question here. In the past, you had talked about the MOBs being a place -- an area where you might look for acquisitions.
And we've heard commentary about things getting interesting in the senior living space as maybe some struggling operators look to divest assets. Just wanted to get updated thoughts from you just regarding acquisitions if they are on the table.
Raymond Lewis
Sure. I think just as a general comment, Bryan, that healthcare assets have generally been performing pretty well.
And there is also -- because of their relative performance, they've been able to access capital from lenders like Fannie and Freddie, HUD and others. So we haven't seen a lot of these assets coming to market under distressed conditions yet.
Certainly, the longer the current conditions persist, the more likely it is we'll see those types of opportunities. That having been said, I think we're seeing a handful of opportunistic situations that may become interesting.
Certainly, we're well positioned to capitalize given the balance sheet statistics that Debbie has been talking about. But we're going to be patient I think and disciplined in our approach to these opportunities.
Bryan Sekino - Barclays Capital
Okay. Thanks for taking my question.
Debra Cafaro
Thank you.
Operator
And your next question comes from the line of Rich Anderson from BMO Capital Markets.
Richard Anderson - BMO Capital Markets
Thanks and good morning everyone.
Debra Cafaro
Hi Rich.
Raymond Lewis
Hi Rich.
Richard Anderson - BMO Capital Markets
Just talk about that hedge for a second as you called it for reimbursement rates between LTACs and SNFs. Make sure I have this right.
Your SNF portfolio is about twice the size of the LTACs, at least the Kindred portfolio is twice the size of the LTACs, is that correct? Kindred SNF portfolio?
Debra Cafaro
Yes, the rent is about -- it's like 40%, 60%, something like that.
Richard Anderson - BMO Capital Markets
Okay. And then you have 30 other non-Kindred SNFs, is that about right?
Debra Cafaro
We do.
Richard Anderson - BMO Capital Markets
Okay. So I just wanted to, as I go through that math --
Debra Cafaro
What I'm suggesting, there are two things that are important to understand. One is that the LTAC coverages are significantly higher.
So they have a different sort of weighting. They also have a much bigger Medicare component than the SNFs do.
Richard Anderson - BMO Capital Markets
Right.
Debra Cafaro
And the third thing, again, is that as we've seen over the last 10 years, we've often seen, even though they're both part of the Medicare program, we've seen countercyclical reimbursement trends. And that is continuing.
And what happens is that because we have these pooled multi-facility master leases that have both segments within, those have tended to support and balance each other over a very, very long period of time. And that is very, very important and helpful.
Richard Anderson - BMO Capital Markets
Okay. Why did the management fee go down in the Sunrise portfolio?
Debra Cafaro
Well, as I mentioned, we actually have favorable management contracts with Sunrise. And the base management fee is 6%, but it can flex down under certain circumstances based on performance levels that were set at inception and that compound over time.
And so essentially, it's an alignment in an ascended structure and we're getting the benefit of a 1% diminution in the management fee at this point in time.
Richard Anderson - BMO Capital Markets
Okay, understood. Thanks.
You mentioned the unencumbered pool. How big is it and how much of that can you actually tap and maintain your investment grade ratings?
Debra Cafaro
It's about 1.5 billion of encumbered assets. And we would intend to use it judiciously.
And we, obviously, through all of our comments and all of our blood, sweat and tears are committed to maintaining and improving investment grade credit profile. So basically, when we do -- if we do a couple of 100 million of Fannie, Freddie deals this year, we're basically just repaying mortgage debt that's rolling off.
Richard Anderson - BMO Capital Markets
Right.
Debra Cafaro
So it's mortgage debt for mortgage debt.
Richard Anderson - BMO Capital Markets
Okay. In terms of your unsecured issuance, what was the rationale to do that at that level?
Can you sort of walk me through the logic?
Debra Cafaro
The bond deal (ph)
Richard Anderson - BMO Capital Markets
Yes.
Debra Cafaro
Sure. So we did seven year bonds at about 9.5%.
Richard Anderson - BMO Capital Markets
I'm saying why -- what was the thought process to tap capital at 9.5% when you have --
Debra Cafaro
Well, basically, we were looking at debt, we were looking at equity. We believe that the debt is modestly a keeper if you will then the equity, which we view, is very precious.
So we try to balance those two. And basically, we'll just use the bond deal to stretch out maturities.
Richard Anderson - BMO Capital Markets
Okay.
Debra Cafaro
We paid a little bit more per tenor (ph) and used that money to pay off near-term liquidity. So I think it works the way we hope and our equity holders were pretty excited that we could print a deal in the single digits when we did.
Richard Anderson - BMO Capital Markets
I think it was outstanding. Now in terms of equity, you did your deal at 23.90 and you tested the $30 mark again.
I mean is equity off the table to revisit or are you sort of good for now?
Debra Cafaro
Well, we have a great balance sheet, so we're good for now. But I do want to say, we love making money for our stakeholders.
We want our stakeholders to know that when they buy Ventas paper, they are going to make money. So we feel good about that.
And I think for the time being, equity is not necessary. We have -- equitizing the company to the point where we have fabulous balance sheet and liquidity.
Richard Anderson - BMO Capital Markets
Okay. Just one or two more.
In terms of the new credit facility, is there an order of priority where you have to use the more expensive portion first or is there no sort of structure like that?
Richard Schweinhart
This is Rick Schweinhart. We in effect have -- do well broken between Canada and the United Sates.
But there is basically a kind of a mix in each one. So it's basically right at that 217 bps that I mentioned.
Debra Cafaro
It carries us to pro rate.
Richard Anderson - BMO Capital Markets
Pari passu. Okay, great.
And then finally, anymore of these types of sale opportunities. I can recall several years ago when you sold to Kindred as a sixth and they sold and then they -- then they did the same thing at a nine.
Now the numbers are a little different I guess, different circumstances, but are there other opportunities within the portfolio that you could see right now or do you think that you've done a pretty good job at getting rid of those sort of win-win situation for the two of you?
Debra Cafaro
Well this is the fourth time I think that we've done this at lease maybe a little bit more and overtime, there will always and develop underperformer and it is great for both companies when Kindred can buy assets for 58 million and then resell them for 10 to 15 and how to be good for both sets of shareholders. So, we are happy to continue improving the portfolio this way and as opportunities present themselves which I assume overtime, they'll continue to do so, we'll hopefully work with Kindred to execute.
Richard Anderson - BMO Capital Markets
So there are a few more weak links in the portfolio that looks --
Debra Cafaro
As my partner, Rich Schweinhart says, there is always a bottom 10%.
Richard Anderson - BMO Capital Markets
Okay. Thank you very much.
Debra Cafaro
Thank you.
Operator
And your next question comes from the line of Omotayo Okusanya from UBS. Please proceed.
Tayo Okusanya - UBS
Good morning, Debbie. First of all, congratulations on just building a fortress of a balance sheet and should start (ph) very well in the future.
Debra Cafaro
Thank you.
Tayo Okusanya - UBS
A couple of questions. First of all, I know you don't get asked this much, but the loan work, just curious at this point if there is anything in there you're watching closely.
I know last quarter, you had the Sunwest write offs, but kind of trends at this point in regards to delinquencies or non-accruals would be helpful.
Debra Cafaro
We have a loan loss reserve that we took a quarter or two ago on Sunwest of $6 million. Everything else in the loan portfolio is completely performing and doing well.
Tayo Okusanya - UBS
Okay. That's helpful.
And then the second thing, the transaction you just did with Kindred was the sale of the underperforming SNFs. I mean I always understand why these transactions make sense for you, and I do understand it's accretive to Kindred assets.
But I always still scratch my head when they buy something at $58 million and sell it between 10 to 15 million, how that's value adding for anybody?
Debra Cafaro
The Kindred (ph) stock goes up 5 to 10%.
Tayo Okusanya - UBS
Right. I mean, could you just kind of help us understand that a little bit better?
Debra Cafaro
Yes, I can help you understand it easily. If Kindred -- assume that Kindred is losing $8 million a year on these assets, which, they lost 2 million in the first quarter, they are negative from an EBITDAR standpoint, even before rent.
Tayo Okusanya - UBS
Right.
Debra Cafaro
So Kindred is essentially investing the difference, between 58 million and 15 million, which is $43 million, to get a very significant return, which consists of it stopping losing --.
Tayo Okusanya - UBS
Avoiding the loss.
Debra Cafaro
$8 million a year.
Tayo Okusanya - UBS
Okay.
Debra Cafaro
So essentially, it's getting an $8 million return on a $43 million investment.
Tayo Okusanya - UBS
Got it. Okay.
Debra Cafaro
We all know we've made that investment all day long.
Tayo Okusanya - UBS
Got it.
Debra Cafaro
But that's why it worked so well for them.
Tayo Okusanya - UBS
Got it, got it. Okay, that's very helpful.
Thanks Deb.
Debra Cafaro
You're welcome. Thanks for joining.
Operator
And your next question comes from the line of David AuBuchon from RW Baird. Please proceed.
David AuBuchon - Robert W. Baird & Co.
Thank you. Rick, can you review the specific assumptions relative to the Sunrise portfolio?
I believe last quarter, you ranged at 110 million to 125 million. And the low end was based off a 150 basis point decline in occupancy and rents and a 2% increase in expenses.
It looks like you're running behind on the occupancy and the rents so far, but ahead on expenses. Any sort of commentary regarding your future expectation there?
Richard Schweinhart
David, I think when we look at the Sunrise portfolio and developing the range, we run multiple sensitivities where we consider occupancy, rate and margin and sort of run different sensitivities around those to try to create a box around the range and the things that might have to happen to get to either end of the range. I think as we mentioned, just generally, we expect to see continued softness throughout the year.
I think that the first quarter, on an annualized basis, certainly looks good and gets you toward the upper end of the range. Certainly something we would be happy with.
And then we've left ourselves room for continued softness in occupancy rate margin through the balance of the year to get to the lower end of the range.
David AuBuchon - Robert W. Baird & Co.
Okay. And where are rates today?
You mentioned that the occupancy has stabilized in the 87% range, have rents stabilized mark-to-market and I realize there is just one month?
Richard Schweinhart
Yeah, again, I think the rates are relatively consistent with what we're seeing in the first quarter in that $170 range.
David AuBuchon - Robert W. Baird & Co.
Okay. And how quickly -- what your sense on a how quickly that portfolio can turn assuming that bought up here and again understanding your guidance for the year, but how quickly do you think that portfolio can turn assuming that the market stay where they are today, the capital markets and the economy starts to push forward again.
Richard Schweinhart
Well, certainly, there is favorable supply demand demographics in the senior housing market generally. There has been limited new supply coming on line over the last few year.
And the demographics are only going to continue to drive additional demand. We're also very happy about the fact that these are very high quality assets and high barrier to entry into wealthy markets in major metropolitan areas.
And so our hope is that as and when the economy bottoms and turns around and consumer psychology improves to the point where people are more comfortable making major purchase decision that we could see a very healthy rebalance in this portfolio quickly.
David AuBuchon - Robert W. Baird & Co.
And are your thoughts regarding the senior housing segment really focused on the higher end? Would you -- assuming that we're going to pass the worst point in this cycle, would you look at acquiring assets in the lower end of that segment?
Debra Cafaro
I just want to be careful about saying assuming we have passed the worst of the cycle, I mean we're not that's not really what our assumptions are because there is a lag in our economy experienced major shock in the fourth quarter 6% (ph) TDP contraction in the first quarter, if you are resident the senior housing asset you are not going to by and large move out but as these shock and major contraction have a lagging effect. And so they can continue to just like unemployment they can continue to affect the fundamental economy for many quarters after those shock and after the stock market improves.
And so we're assuming that there will sort of continued economic fundamental weakness throughout the balance of the year in our range, which we kept at 1.10 to 1.45. If things get better, we will certainly be happy and, as Ray said, I think the portfolio will be able to turn relatively quickly because of the positive supply demand and the demographic need-based characteristics of the business.
But I do want to be careful about suggesting that we are at an inflection point and all of a sudden we are off to the races. So please take that into account in your thinking about the portfolio and about Ventas.
David AuBuchon - Robert W. Baird & Co.
Point taken. I guess what I'm trying to figure out is your interest in this space solely focused on the higher end?
Debra Cafaro
We have assets across the board and we believe that we should play at different price points.
Raymond Lewis
Yeah, David, I think that what we tried do is find assets that are competitive within the markets that they serve. And so finding a good, stable product and a secondary or even tertiary market at appropriate risk adjusted return that has a lower price point to attract residents that are in that marketplace, that's a nice investment for us.
Really I think what we're looking for when we look at these deals is, is it the appropriate risk adjusted return for the profile of the asset that we're considering.
David AuBuchon - Robert W. Baird & Co.
Okay. And then one more question regarding the MOB port folio, can you just give us a sense of what -- has that portfolio met your expectations so far this year and maybe what you're same-store forecast will be for the balance?
Raymond Lewis
The portfolio is performing well, it's generating stable and consistent cash flows. And we are sort of expecting the future to look a lot like today.
David AuBuchon - Robert W. Baird & Co.
Okay, thanks.
Debra Cafaro
Thank you.
Operator
And your next question comes from the line of Rob Mains from Morgan Keegan. Please proceed.
Robert Mains - Morgan Keegan & Co.
Good morning. Just got a couple of numbers questions and the guidance please.
One is that CapEx figure for the first quarter, should we assume kind of like last year where it ramped up or is that a good run rate?
Debra Cafaro
You should assume a ramp up.
Robert Mains - Morgan Keegan & Co.
Okay. And then the line where you've got the adjustments to get from FFO to normalized FFO, Rick said there is 7 million of debt extinguishment its coming.
Is there anything else that's going to be larger in that market there because you only had a penny of that in the first quarter?
Debra Cafaro
Right. The categories of things that go in there are tax benefits, merger related costs and expenses which includes the litigation costs and loss on extinguishment of debt.
Those are the major items.
Robert Mains - Morgan Keegan & Co.
Okay. I can guess which one of those might be going up a year ago (ph).
Okay, that's all I have. Thank you.
Debra Cafaro
Thanks Rob.
Richard Schweinhart
Thank you.
Operator
And your next question comes from the line of Jim Sullivan from Green Street Advisors. Please proceed.
Jim Sullivan - Green Street Advisors
Thank you. Can you be more specific about the performance triggers like the Sunrise management contracts, you go 6% to 5%?
Debra Cafaro
We can be more specific, Jim, in conceptual terms, and that is when the assets were first put under management contracts, there was NOI projections that would compound in relation to CPI. And over time, NOI has to meet those levels, or if not, there is a rationing down of the fee in quarter basis point increments to a floor of 5%.
And that's how it works and that's why we're getting the benefit of the flex down.
Richard Schweinhart
It's primarily tied to NOI.
Richard Schweinhart
Yes.
Debra Cafaro
Yes, it's tied to NOI and then the percentage change is off revenue because obviously it's a revenue-based fee, but the performance targets are NOI based.
Jim Sullivan - Green Street Advisors
Okay. Sounds like it was a couple of --
Debra Cafaro
Is that clear or did I confuse the issue?
Jim Sullivan - Green Street Advisors
Helpful, but it leads to some follow ups in terms of how they rectify that, i.e. kind of get from 5% back to 6.
One would be --
Debra Cafaro
If they perform better.
Richard Schweinhart
It generates more NOI, yeah.
Jim Sullivan - Green Street Advisors
Yeah, I understand that. So specifically interested in what they are doing as far as revenue and what they are doing on the expense side.
On the revenue side, what are they doing specifically to stem the occupancy erosion? And I'm interested specifically if they resorted to discounting and perhaps discounting heavily in order to stem the flow of tenants out of the property and get some new tenants in.
Raymond Lewis
Yeah, so Jim, we've spent a lot of time with Sunrise at the beginning of this year to go through a promotional pricing strategy in our assets to make sure that we were discounting the units where it was appropriate to do so. So for instance, a less desirable unit that has been backend for a longer time in a community, might get a discount where a unit that recently emptied, but was an attractive unit, would not.
And so what we've tried to do is be thoughtful about discounting, take a disciplined approach and apply consistently across the portfolio and I think it's translating into a pretty good rate and occupancy balance in our portfolio.
Jim Sullivan - Green Street Advisors
When you quote ADR, are you including the discounts?
Raymond Lewis
Yes.
Debra Cafaro
Yes.
Jim Sullivan - Green Street Advisors
Okay. And then another way for them to get from five back to six is on the expense side.
What are they cutting specifically in terms of expenses and are those expense savings sustainable or are they expenses that you can achieve when you're running at 87% occupancy, but won't be able to maintain if you get back to 90, 92?
Raymond Lewis
I think as I said, the variable labor controls have been much better in two regards this year. One is a resetting of the standard.
And that is the variable labor standard that's applied across all of the communities and what each of the community managers is expected to achieve based on certain occupancies. So they've ratcheted down the standard.
And then they've also improved their compliance management with that. So they are measuring it on a daily basis to really get tight on the variable labor expenses, which are one of the largest single expense drivers within a community.
Jim Sullivan - Green Street Advisors
Okay. And then with respect to geographic performance of the Sunrise portfolio.
Is there any correlation between the performance of your portfolio and the housing markets that have experienced the most distress?
Raymond Lewis
It's interesting Jim. We actually did some work on that before our call to see if we could draw some conclusion and really in our portfolio we're not seeing any particular correlation between the performance, the occupancy of our asset and the strength of a particular housing market.
And I struggle a little bit for a reason for that other than perhaps our properties are generally the best in their market, generally very well located and therefore any impact of a housing is some what muted given the asset quality although that's the only conclusion I could really come up with.
Jim Sullivan - Green Street Advisors
And with respect to CapEx can you remind me what your budgeting CapEx for units in the Sunrise portfolio and if you are rethinking the level of CapEx for '09 in the face of diminished NOI?
Raymond Lewis
I think we have said its going to between 1000 to $1200 per unit some where in the neighborhood $7.5 million a year and we're going to continue to move forward with that. We want to make sure that we're investing in our community to keep them competitive, to keep them fresh and make sure that we're well positioned to take advantage of the market rebound that we talked about earlier.
Jim Sullivan - Green Street Advisors
Okay. And then finally you're still showing 2 million in the quarter I think for merger-related costs is that all related to the litigation?
Debra Cafaro
Substantially.
Jim Sullivan - Green Street Advisors
Okay. Thank you.
Debra Cafaro
Thank you
Operator
And your next question comes from the line of Jacob Strauss Water from Broadlink Capital. Please proceed.
Unidentified Analyst
Hi good morning.
Debra Cafaro
Hi Jacob.
Unidentified Analyst
Can you help me by repeating the debt that you brought back over the quarter?
Debra Cafaro
Yes. And we have released out a tender release, but we've brought back 306 million in principal amount, about 100 million -- I am rounding -- about 100 million of 10, about 104 million of the 12 and about 98 million of the 14 and we also paid off all of the nine.
Unidentified Analyst
Thank you very much.
Debra Cafaro
You're welcome.
Unidentified Analyst
One other quick question. Are you seeing buildings trade, if you are, is there a cap rate in the industry right now that you're seeing?
Debra Cafaro
Well there is a limited amount of data on transactions.
Unidentified Analyst
So does that give you an ability to guide to me to a range --
Debra Cafaro
I will hereby create a market. So it's hard to provide cap rate guidance to you in the absence of transactions.
Most people are trying to triangulate with historical cap rates and debt rates that cause right now. But hopefully at some point, things will start to try loose and we'll be able to give you a better insurance more specificity.
Unidentified Analyst
Thank you.
Debra Cafaro
Thank you. So Kameesha, do we have any further questions?
Operator
At this time, there are no questions in queue.
Debra Cafaro
Okay. Well, I want to thank everyone for joining us this morning and I want to leave you where we started, which is that things are good at Ventas and we very much appreciate your participation and we look forward to seeing everyone at NAREIT in June.
Thank you.
Operator
Thank you for your participation in today's conference. This concludes your presentation.
You may now disconnect and have a wonderful day.