Welltower Inc (WELL) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Health Care REIT second quarter 2007 earnings conference call.

Today's call is being recorded.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session.

Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Ms.

Stacy Feit of the Financial Relations Board.

Please go ahead, ma'am.

Good morning.

Thank you for joining us today for Health Care REIT's second quarter 2007 conference call.

In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the Company's website at www.hcreit.com.

I would like to remind everyone that we are holding a live webcast of today's call which may be accessed through the Company's website as well.

At this time management would like me to inform you that certain statements made during this conference call which are nonhistorical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Health Care REIT believes that expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the news release and from time to time in the Company's filings with the SEC.

Having said that, I would like to now turn the call over to George Chapman, Chairman and CEO of Health Care REIT for his opening remarks.

Please go ahead, sir.

Thank you, Stacy.

Thus far in 2007, our year has unfolded as anticipated.

We closed the acquisition of 17 additional medical office buildings as well as the Paramount Real Estate Services company from the Rendina Group.

In doing so, we completed our property management platform, making us one of the largest, most seasoned managers in the United States singularly focused on medical office properties.

Our integration efforts are substantially complete and we continue to add key people and enhance our systems in order to maintain our reputation as a proactive manager of every aspect of our business.

In addition to the teams that joined us as a result of the Windrose and Paramount transactions, we have added 25 additional employees in all areas of our company to bring the total employee count to 178.

As a result of our investment activity to date, the private pay component of our portfolio has reached approximately 64% with MOBs constituting 26% of the current investment balance.

These changes together with the enhanced portfolio diversification and the broader spectrum platform have been well received in the marketplace.

We're the highest rated Health Care REIT by Moody's, at BAA 2, BBB flat with Fitch and BBB minus with a positive outlook from S&P.

Moreover, our recent convertible debt transaction was very successful and demonstrated our ability to access capital.

More later when Scott takes a -- takes the dais.

We're now executing on our strategy of replicating our relationship investment programs and asset management approaches in the MOB and acute care space.

We've noted in the past that of our approximately $2 billion of shadow pipeline the vast majority of such relationships are in the long-term care arena.

That is assisted living, independent living, CCRCs and skilled nursing.

As we add relationships in MOB and acute care space, we believe our deal flow will have even greater certainty and drive higher volumes.

Despite longer lead times in capturing investments and relationships within the MOB and acute care space, we believe we're making a relatively rapid progress as our vigorous efforts to be a leader in this sector begin to produce results.

We will have more specific information in our third quarter and year end calls as investments are made and agreements for development and property management services are concluded.

Let me take a moment to comment on market conditions and what these conditions will likely mean for the Health Care REIT sector generally and HCN specifically.

Obviously share prices have fallen dramatically due to a number of factors including global and sector issues.

While I feel the adjustment is too severe, it is not utterly surprising given the rather wide swings we have seen during the last five to ten years as reallocations have occurred.

We remain confident that our story is strong and will result in reasonably priced equity in time.

At the same time, the debt markets have been royaled, resulting in a significant increase in the cost of loans in the real estate arena.

There are two likely results if the markets remain the same.

Cap rates must increase, i.e.

real estate prices will fall and two, sellers and operators will be and, in fact, are already beginning to seek other ways to finance transactions.

We, therefore, see this as a period of opportunity as is evidenced by our increased acquisition guidance of 100 million at the midpoint.

As a result of the recent convertible deal and the line expansion, we have our entire $1.15 billion line available as dry powder.

And this combination of a strong transactional marketplace together with plenty of capacity make us feel that this will likely be a period of excellent investment opportunities.

With that, I'll now ask Ray Braun and Scott Estes to comment on portfolio and financial matters.

Thanks, George.

I'm going to first review investment activity, provide a little bit of color on the market, and then address our portfolio matters.

During the second quarter, we completed $418 million in new investments including MOB acquisitions of $312 million at an average yield of roughly 7.2%.

We did one LTAC for $11.9 million, a yield of 9.8%.

We had capital expenditures and loans of $23 million with an average yield of 9.3% and funded CIP of $71 million with an expected average yield of 9.6%.

The highlight of the quarter as George alluded to was the acquisition of 17 medical office buildings in the Paramount Real Estate Services from the Rendina Companies for approximately $292 million.

The purchase price was based on projected cash 2007 NOI of approximately $21 million.

We relocated our property management and property accounting functions to the Paramount offices in Florida.

Turning to development, there's a schedule, exhibit 9 on the earnings lease detailing our development activity.

We currently have 23 projects with 2600 units and total commitments of about $600 million.

On the disposition front, we had $27 million of dispositions at an average yield of 9.9%.

I'll turn now to provide a brief market update, cap rates in the healthcare sector have obviously compressed over the last few years.

When we look at the most recent NIC statistics, the cap rates in the fourth quarter were 5.9% for independent living, 6.5 for assisted living and CCRCs and 11% for skilled nursing.

Real capital analytics reported that medical office cap rates have been around 6.4% in the first quarter.

Large transactions with high quality properties have been completed at even lower cap rates.

Turning to the portfolio, our portfolio composition is included in exhibit 1 of the earnings release at June 30, 68% of the portfolio was invested in seniors housing and care including independent living, CCRCs, assisted living, and nursing care.

32% of the portfolio was invested in medical facilities comprised of medical office buildings and specialty care facilities.

We currently have 488 properties in our senior housing and care sector with 56 operators in 37 states.

Fundamentals for senior housing and care remains strong including payment coverage and occupancy with coverages after management fees improving in all three senior housing and care subsectors.

The senior housing and care portfolio has 37 properties currently and fill up with an investment balance of (inaudible - audio difficulties).

Turning to our medical facilities portfolio, we have 109 medical office buildings and 20 specialty facilities in 23 states.

Our medical office building portfolio currently has 4.3 million square feet.

The medical office building net operating income was $17.7 million for the second quarter and $34.3 million year-to-date as outlined in exhibit four of the earnings release.

Occupancy at the end of the second quarter was 91% and our annualized NOI run rate is now approximately $88 million.

Turning to specialty facilities, payment coverage and occupancy are listed in exhibit two of the earnings release, payment coverage declined slightly over the trailing 12 months but remains strong at 2.1 times after management fee and improved by 29 basis points in the most recent quarter.

Within our specialty facilities, 15 are long-term acute care hospitals with an investment balance of $156.5 million.

We currently have one specialty care property and fill up with an investment of $13 million.

We've included some additional detail this quarter on our fill up portfolio in exhibit seven to the press release.

Our current fill up portfolio investment balance is $442 million representing 9% of our total portfolio.

One final item I'll note this quarter is we made a slight adjustment to exhibit two in our release to illustrate payor mix in terms of revenue as opposed to patient days as this more directly reflects operating performance and is the more common industry practice.

With that, I'll turn it over to Scott Estes for the financial update.

Thanks, Ray.

Good morning, everybody.

Our second quarter normalized FFO per fully diluted share increased a solid 5% to $0.78 from $0.74 in the comparable quarter last year.

Normalized FAD per fully diluted share increased 1% to $0.73 from $0.72 in the second quarter of 2006.

Both normalized FFO and FAD results exclude $1.75 million in one time acquisition finders fees paid during the quarter as a result of the Rendina/Paramount acquisition while normalized FAD also excludes the benefit of $2.1 million of cash from prepaids and straight line rent receipts during the quarter.

As detailed in the earnings release, the acquisition fee payments were made to former members of the Windrose management team and generally agreed upon prior to the closing the Windrose merger.

Although fees of this nature are typically capitalized as a part of the transactions purchase price, these one-time payments were required to be expensed as compensation this quarter since the individuals who received the payments are currently employees of the Company.

As previously announced, the Board declared a dividend for the quarter ended June 30, of $0.66 per share or $2.64 annually which represents a 3% increase above last year's rate.

The payment represents the Company's 145th consecutive quarterly dividend.

Turning to operating results, gross revenues including discontinued operations totaled $120 million for the quarter, up 49% versus the same period in 2006 with 94% of gross revenues coming from rental income.

On the expense side, our quarterly interest expense including discontinued operations increased to $33.6 million from $23.1 million in the comparable quarter last year primarily as a result of higher average borrowings under our unsecured lines of credit, debt assumed through the Windrose and Rendina/Paramount transactions, and interest from our convertible debt offering completed in November of 2006.

As mentioned previously, G&A expense included the $1.75 million of one time acquisitions finders fees paid to former members of Windrose management as a result of the Rendina/Paramount acquisition.

Excluding these fees, G&A would have been $8.1 million, or 6.8% of total revenues.

Our G&A guidance for the year remains $33 million to $35 million excluding the $1.75 million in finders fees paid this quarter.

Due to the improved quality of our loan portfolio, we again made no addition to the loan loss reserve this quarter which stood at $7.4 million as of June 30.

Moving to the balance sheet now, we did end the quarter with net real estate investments of $4.7 billion and our credit profile really does continue to improve.

Our leverage declined slightly to 48%, debt to undepreciated book capitalization at the end of the quarter as a result of our successful equity offering in April which raised over $265 million in net proceeds.

Our adjusted interest coverage currently stands at a solid 2.9 times.

We are very happy with our recent increase in our bank line to $1.5 billion with an extended term of four years and current pricing of LIBOR plus 60 basis points which represents a 20 basis point reduction.

We also rolled our $40 million swing line into the main credit facility and added eight new Banks to our revolver syndicate group.

In terms of credit ratings, as George mentioned, we were also pleased with our recent upgrade from Fitch to BBB flat and S&Ps improved outlook to BBB minus positive from stable.

Our debt maturity schedule is in good shape currently with only $95 million in senior notes and $31.5 million in secured debt maturing through year end 2008.

We also would anticipate some interest savings when we use our new line to pay off $52.5 million in senior notes maturing next week on August 15, which have a coupon of 7.5%.

On the capital front, we successfully completed a $400 million convertible debt offering in July with a coupon of 4.75% and conversion price of $50 per share which is used to pay down our line of credit.

Our DRIP plan, again generated solid interest as we issued approximately 450,000 shares for $19.2 million in proceeds during the quarter at an average price of about $42 to $43 per share.

At this point we really are in an excellent position from a capital availability perspective as George previously mentioned.

We do have our entire new $1.15 billion line of credit available to us as of today, providing great flexibility in allowing us to finance our future growth objectives.

Now turning to guidance for our 2007 investment guidance.

The Company continues to anticipate gross investments of $1 billion to $1.2 billion but is adjusting the amounts of acquisition versus development funding.

Based on the strength and visibility of our pipeline, we've increased the acquisition component of our gross investment forecast to $750 million to $950 million from the previous $700 million to $800 million.

New development funding is now projected at approximately $250 million from the previous range of $300 million to $400 million.

I do think it's important to note that the slight decline in our funded development guidance for calendar 2007 is primarily a function of timing on several projects and that our overall development pipeline remains very strong as George detailed earlier.

Finally, the Company continues to anticipate $100 million to $200 million of payoffs resulting in a net investment total of $800 million to $1.1 billion this year.

With respect to earnings guidance we are increasing our normalized FFO forecast to a range of $3.09 to $3.15 per fully diluted share from the previous range of $3.06 to $3.14 per share due to continued success on the investment front and projected interest savings from our recently completed convertible debt offering.

We're also increasing our FAD guidance to $2.91 to $2.97 per fully diluted share from the prior $2.82 to $2.90 range due to first the increase in acquisition guidance to $750 million to $950 million.

Second, the benefit from the July convertible debt issuance.

Third, cash receipts during the second quarter of $2.8 million.

And fourth, a reduction in our CapEx attendant improvement leasing commission expectations from $7 million to $6 million, all of which were only partly offset by the impact of the $1.75 million in acquisition fees paid during the quarter.

Lastly, our new normalized FAD guidance of $2.87 to $2.93 per fully diluted share excludes the impact of both the cash receipts received year-to-date and the acquisition fees.

I would point out that the range is above our initial normalized FAD guidance at the outset of this year of $2.80 to $2.88 per share.

With that, I'll turn it back to you, George, for questions.

Thank you, Scott.

As we're opening up for questions, I'd also point out that Fred Farrar is with us from Indianapolis and will be available for questions as well.

So we're open for questions at this point.

The question and answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll go first to Chris Pike, Merrill Lynch.

Good morning, everyone.

How are you doing?

Hey, Chris.

We'll go next to Jerry Doctrow, Stifel Nicolaus.

Good morning.

Just a couple of things.

What everybody seems to be concerned about is just sort of outlook particularly in senior housing, on sort of housing market impact.

Obviously, you guys had improving coverage pretty much across the board.

Just curious if you can give any additional color on what you're hearing on tenants?

Whether that concern is real or significant or not?

It's Ray, Jerry.

Good morning.

Hi.

I think what we're hearing is in the entry fee type communities there is some incremental impact occurring.

In terms of skilled nursing and assisted living, no real impact.

Okay.

Any sense whether you see it getting better, worse, or just people more concerned, less concerned?

We're watching it carefully.

It's affecting some communities more than others, and we'll keep people posted but I don't see a dramatic change in our expectations due to the housing market.

Okay.

And then wanted just a little more color on acquisitions and obviously you guys are feeling pretty confident about increasing it.

I think George mentioned, as we've been hearing from some others, that the disruptions in the credit markets should benefit the REITs.

Any sense of just sort of what mix, I mean, MOBs versus acute care, versus senior housing versus skilled?

Any more color there on kind of what you're seeing and where the appetite is.

Well, Jerry, I think we're gaining some momentum now as we get the word out and we do a better job of blanketing the country in the acute care space, the MOB space.

Bit I also mentioned to the group that there are larger, longer lead times.

At the same time, we're seeing some opportunistic situations in skilled nursing and for that matter the CCRC and combination sites.

So this is the same issue we have, I think, when we talk to the rating agencies and the capital markets generally.

We're very opportunistic in a short period of time.

But over time, just to put it in a larger perspective, we -- are soon going to -- we're going to be moving more toward the combination of CCRCs and more acute care MOBs over time.

In the short term it's just impossible to determine.

Do you see rates, your yields, initial cash yields moving up along with cap rates?

I think you indicated, George, that cap rates inevitably have to go up based on the debt.

What should we be thinking about in terms of initial yields on investments go forward?

I think we've all -- we all recognize the fact that cost of capital's going up, that the debt market is creating some problems and the way I look at it, opportunities for people like us but the cap rates aren't bouncing off the bottom quite as quickly as the rates are moving up, or the costs are going up, Jerry, so we're going to have to make some big decisions, you know?

Are we not going to do a deal, an MOB at 7%?

Are we going to go at 7.5?

How real is this increase in debt costs?

What's going to happen in the next three to six months depending on what the fed will do probably not next time but the time after?

There's a lot of guesswork.

We're certainly every week now sitting down with our whole team and looking at what we deem to be our cost of capital.

We think it is a very real issue right now.

Generally trending up maybe 25, 50 bips but hard to see how quick it happens, is that?

That's exactly right.

I think it's hard for deals to be done in and around the 6% cap rate.

Like we've seen some done recently because they're significantly dilutive at that level in today's market so I think they're going to have to trend upwards.

Then just the last thing, this is more for Scott.

There's this issue I think FASB's now suggesting that, or has an initial ruling out looking at changing the way the converts debt is basically going to be priced as it affects FFO.

I was wondering if you guys have looked at that?

I think it is proposed that it'll come in 1/1/08, what impact that will have on your convert?

Is that something you're thinking about?

Sure, Jerry.

Let me give you a little background on that.

You're correct on July 25, FASB did issue a tentative statement that would change the accounting for net share settled convertible debt.

It would still need to go through a comment period but it does appear likely to be effective beginning January 1, of 2008 and would require a restatement of prior periods.

At this point, we'll continue to use our current accounting treatment for the remainder of 2007, but in essence, under the new treatment a portion of the proceeds from the issuance of notes would be allocated to the warrant conversion feature and be recorded as equity.

That would result in a discount to the note on the balance sheet.

That would be charged to interest expense over the expected five-year life of the issuance.

The resulting impact of earnings would be an increase in noncash interest expense which would impact FFO but not FAD.

We'll obviously be watching it closely and we'll also be in the same boat as many others.

We've looked and there's some 64 REIT transactions for over $20 billion that have occurred over the last five years.

We've -- I guess it depends, we've guesstimated an approximate impact by year.

We have our November convert would be, of 2006 would be about $0.005 adjustment to 2006, it would be about $0.05 or $0.06 to 2007 and about $0.07 to 2008.

How about the July, is that?

That would be included in the 2007 and 2008 number.

Okay.

Sorry.

Thanks a lot.

Sure.

We'll go next to Philip Martin, Cantor Fitzgerald.

Good morning.

Wanted to -- well, the first thing I have to do, I have to figure out how to beat Jerry to the calls in the morning.

He's got that fastest finger.

I have to congratulate him there.

In terms of MOB development, when does medical office building development become a larger part of your development program?

You know, incrementally, when do you see that ramping up?

I know you did Windrose, Rendina and it's just getting those under your belt I know, but when is the ramp up there?

You are talking about development, Phillip?

Yes.

Well, even now we're signing transactions as I indicated and we'll have more specificity in our third quarter and year end calls but I think we're making some good progress with hospital systems and working with developers that we have close ties to in that space and I think you'll definitely see some pretty good movement.

Why we're reluctant to talk too much about it is that we're just getting to the point where we're signing deals and the lead times are so great that we want to wait until we have deals underway and we can be a little bit more precise about giving information but we're very bullish about our efforts paying off in the next couple three quarters.

Ray?

It's not going to start being material in our portfolio for a couple years.

Yes.

It's just the lead times are so long.

Sure, sure.

In terms of visibility, okay, so we can see that ramping up here over the next year, at least where it's showing up in development pipelines and you're talking about it and giving us an idea of locations, on and off campus, et cetera?

I think as George indicated by year end, our year end call we'll be able to give you some more color on that.

That's good news.

Philip, I would add again, I'd like to emphasize that we're not trying to look at these necessarily as transactions because as you know, in the long-term care space, defined broadly, we've always been relationship programmatic players.

So when we form relationships with systems, with developers and with others, contractors, we're looking at this as more of a long-term relationship play and we are, in fact, making progress in replicating in a different way our relationship programs over into the acute care and MOB space.

It'll be fairly steady once we have the program in place.

Okay.

Okay.

And again, is this, I mean, at this point, is it pretty evenly balanced?

The medical office building development that you're working on and looking to add over the next 12 months, is it a pretty equal mix of on and off campus medical office building, specialty hospital?

Or is it just too early to say?

It's too early, Philip.

Okay.

That's fine.

Now, on the over the next 12 months, where would you think your development pipeline in aggregate would be?

I'm just trying to look again how it ramps.

This is overall development, not just medical office but healthcare community healthcare facility.

Where do you think that development pipelining aggregates in a year?

Philip, I'd rather wait until year end.

Obviously we have toward $2 billion in the long-term care arena.

We are making, I think, rather heroic efforts through the Freds and Dan and Ray and me being out there and our marketing team.

Our goal would be at some point in time to have a rather equal mix between the two.

Okay.

When we get there, it's difficult to predict.

Okay.

That's fine.

In terms of the development of the skilled nursing portion of your development pipeline, I know it's not a huge portion but of that skilled nursing development, I'm assuming that's mostly expansion to existing properties.

Is that being driven by a need for more private pay and/or Medicare or is it being driven by a need for more Medicaid bets?

Generally when you have higher end facilities, especially when you look at replacement facilities, you're tending to appeal to higher income, a private pay, Medicare patient and you have certain states where that is going on fairly aggressively such as Texas.

We've seen quite a bit of it even in Ohio.

Many times, too, Philip, those beds in those replacement facilities will be put up in connection with other types of facilities such as assisted living or Alzheimer's.

Because that seems to be the preferred mode going forward.

So I think that's what we're seeing, but on the other hand, there are some awful Medicaid mills out there, too, that need replacing.

We just have tended to be supportive of the higher end SNF going forward and probably mainly within combinations.

Okay.

And to that end, you talk about the Medicaid mills but even from an investment standpoint going forward, are you given your platform now is there an opportunity for you to look at more opportunistic type investments, maybe properties that are suffering from some occupancy issues or suffering from not the right patient mix, et cetera?

Is that something that might be an opportunity over the next 12 months?

With the right operators, we're always opportunistic.

The key for our investing is picking the right operators who see opportunities and who can execute.

It may be that they're a company that's been around for a long time or a group of managers that have spun off from an existing public company who we've known for 15 years.

We're always looking for opportunities.

We've told the Street as well that while our preferred mix is CCRCs and combinations on one hand and MOBs in the emerging new hospital platforms, acute care platforms, if we see an opportunistic deal in the SNF arena where we can get a good return and get some great terminal value in some ways we're always going to try to make money as well.

So we're very opportunistic.

Okay.

Now, my last question in exhibit one, kind of toward the bottom of that exhibit, the investment per bed metric for independent living CCRCs, obviously the unit numbers have grown year-over-year.

The properties have grown.

The investment per bed though at $145,000 per bed, that's up from $112,000 last year.

Can you talk about the incremental, the 15 assets that were added over the last year?

That implies something like a $320,000, $325,000 per bed on the incremental investment made.

Can you talk about those properties that were added and, well, first of all, is that $320,000, $325,000 per rack?

If it is, what's so special about these properties given that price?

It's Scott.

I guess would I first point out that as you look at that schedule that is the aggregate committed balances of projects that may be just underway which are a lot of our campus-type communities and CCRCs which obviously are a higher price per bed.

I would argue that's the biggest contributor as to why that number's up on a per bed or unit basis.

Okay.

So they are the larger aging in place CCRCs?

Correct.

You can see the difference between that part of the chart and the part of the current investment balance.

Up above?

$300 million.

Yes.

Okay.

So it was just a matter of, okay.

That's understood.

Yes.

Thank you.

Sure.

We'll go next to Rich Anderson, BMO Capital Markets.

Good morning, everyone.

Good morning.

Can you just dumb this down for me?

You mentioned the impact of the housing market on senior housing.

How would that happen in more specifics?

The concern is that people sell their house when you're elderly and it's almost all equity.

They take the proceeds from the house sale and they use that to get their care in a senior housing and care facility.

To get their what?

To move into a facility.

Okay.

Okay.

So if their housing prices go down, they're less willing to sell, or they can't sell and therefore they can't move in.

Okay.

The situation where we see a little bit of it anecdotally is in entry fee communities where you have to pay an entry fee that oftentimes matches median housing prices in a market in order to get access to a community.

Okay.

All right.

And turning to a question for, I guess, for my friend Fred over there, somebody mentioned the cap rates on medical office buildings 6.4 and even for higher quality large portfolios, cap rates falling below that level.

You did [7.2] on the Rendina assets.

So should we extrapolate that to mean a large portfolio of low quality?

Rich, how are you?

I don't believe that extrapolation makes sense.

That was an ongoing long-negotiated deal of a continuing relationship.

So I would just reiterate we're very disciplined in our acquisition strategy, and are cap rate focused.

As you know from the Windrose history, we were rarely the low bidder but frequently got deals to come back to us.

That's a very nice portfolio from Rendina at a attractive package rate including purchasing the management company.

Okay.

Scott, you mentioned the finder's fee.

You explained why it was being expensed in this quarter but it sort of got a little choppy like there was some noise when you explained that.

Can you just explain again why it was separated out from the purchase price?

Let me take that, Fred.

We could have paid that, Rich, last year.

Because the main issue in closing up Rendina really related to getting necessary consents probably a low risk that the closing wouldn't occur but we chose to be conservative on it.

We could have easily have just thrown it right through the merger accounting and been done with it.

We thought the -- one that it made sense from a conservative standpoint.

Two, that the Street would understand the nature of the fee as a one-time nonrecurring fee.

I think that's the case.

Will finders fees be a somewhat regular course of business for you?

No.

That was a hotly negotiated item, too, as part of the merger.

So I'm not going to let Fred get on and talk too much about that, but we do have incentive programs as part of Chuck's marketing team and so we think to incentive programs for our marketing people are very worthwhile and appropriate given the particular roles for people in that area but these kind of finder's fees will not be -- you will not see them again.

You mentioned the property management moving to Florida.

Is that for the entire MOB portfolio that you run now?

Yes.

And Fred will be running that from Indianapolis.

Fred, you might want to comment on it.

I must say before you do, that I have been very, very pleased with Mike Noto and Brian and the team down there.

They have just come in very, very quickly and have been great partners for us and are very professional, do a great job.

Fred, why don't you make some comments?

I would reiterate that the team down there, Mike Noto and Brian Dunley are a very seasoned, experienced property management team.

They wrapped in our property managers because at its base level property management is a local business.

You need people in the market doing a variety of other things.

So the asset management group in the MOB still remains in Indianapolis and through them, we interface very effectively with Paramount and provide a check and balance to manage the process.

Did you lose anybody in the relocation process?

Virtually all of the accounting people left, and a couple of junior people, but the key people stayed on and at the property management level, all of the managers we wanted to stay, stayed.

Last question for George, will you keep the DRIP going at this point?

We've had some talk about that internally, Rich.

Right now, I think we're going to.

We're very hopeful that the markets are going to start moving the REIT space back up.

I don't think it's worth our while right now to do anything precipitous.

Are you going -- have you changed -- or what is the discount that investors get off of that?

2%.

That's staying 2% for now?

For now.

We're always looking at it, Rich.

Okay, thank you.

Yes.

We'll go next to Omotayo Okusanya, UBS.

Good morning, gentlemen.

I'd like to go back to the point about the accounting for the finder's fee.

I still don't -- I'm still not very clear why it makes sense to expense it rather than capitalize it?

Because once we got past the merger we couldn't capitalize it, it just had to be treated as an expense according to our accountants.

We didn't totally agree with them but that's the way it is.

So we have to, I think, trust people to look at it as a non recurring expense and either people do or they don't.

So the deal closed but you were still negotiating this one part of the deal, is that the way it works?

[ -- settled this.]

We had Fred and -- or the Freds and Dan had the deal pretty much locked up.

We thought, at the time we merged we weren't about ready to pay additional compensation or additional consideration as part of the merger until we knew it closed, okay?

Okay.

We could have.

We didn't think that was a wise business decision and therefore when it moved into the following year and we closed the Rendina deal after, was it February?

May, the merger had been completed, there's no way to capitalize it according to our accountant.

That's helpful.

Then the second thing, Ray, you gave us some information in regards to cap rates, but a lot of this data is fourth quarter, first quarter, you guys are out there actively in the market looking at this stuff.

Can you give your sense of just kind of based on deals that may have crossed your desk what cap rates currently look like?

Are they holding firm?

Are they starting to inch up a little bit?

What are you kind of seeing out there?

I think that they have bottomed and are moving up based upon recent activity.

And I think that that's about a 30 to 45-day phenomena that's occurring.

We're still extremely aggressive in the spring and early into the summer.

But I sense that they're changing now and moving up.

Which particular property types do you see the most risk of moving up?

Generally across all of the types that we're investing in.

There was a question earlier about, that Fred took about the quality of the portfolio from Rendina, was a higher cap rate, an indicator that it was a lesser quality portfolio.

But when you look at what happened in the MOB space, cap rates went from 7ish to 6ish very quickly.

Right.

And now they're moving up off of that 6ish number.

That's helpful.

Next point, there was some news a couple of weeks ago about Democrats trying to increase funding for children's insurance and taking some of that money out of Medicare Part A.

Any kind of when you guys think about that, if that happens, do you see any risk to the operators in regards to -- I mean, yes, their profitabilities will go down but is that just the typical more headline noise, maybe reduces your coverage ratios a little bit but that's about it?

That's correct, Tayo.

As you know, we continuously monitor what's happening in the reimbursement environment of both Medicare and Medicaid.

Once again this year, we saw increasing reimbursement generally for property types in those two areas.

If we did see a reduction in a state or in a particular area, the impact would be to the payment coverage that we report and we think we have a pretty good cushion built in on our payment coverages.

There's not a likely increase in payment risk from sweeping reimbursement rates.

Okay.

That's about it.

Thank you.

Thanks, Tayo.

We'll go next to John Calone, Merrill Lynch.

Mr.

Calone, your line is open.

We'll go next to Rob Mains, Morgan Keegan.

Good morning.

Question about the hospital or the MOB acquisition market.

If the public hospitals are kind of a tip of an iceberg in any way for the hospital industry, you would surmise that there are some acute care hospitals that are once again struggling with bad debts and other issues.

I know that they own a lot of their MOB assets and it's questionable whether they should in the first place, anyway.

Are you seeing any movement on hospitals trying to shake themselves loose of some of their MOB holdings?

I didn't catch the end of that.

I think you're asking about what movement there is within the nonprofit world to sell and monetize their noncore assets, is that correct?

Exactly.

Ray and I and Fred and Dan have been, I think, pleasantly surprised with the rapidity of that movement.

We've had meetings with some of the top hospital systems around the country.

It's clear that the old way of thinking about delivering health care is changing and they are also benefiting from some of the rather innovative steps taken even by the for-profit hospitals.

There's a lot of interplay here.

The world is open to all acute care to begin to design and deliver the correct type of preventative medicine and wellness with the right equipment, the right doctors and to do that, they know they have to monetize their noncore assets.

They're very open to it.

I've been very pleased with that.

I think the fact that we're programmatic in our approach, and that we have a -- years and years of experience in the acute care space as well as long term care means we talk the talk with them, and I think we'll have very good success in that area.

I don't know, Fred, do you want to add anything?

I think you handled it pretty well.

One of the issues in systems selling their assets is making sure that they sell to a long-term hold, not someone who flips it in a couple of years.

That, I think, is one of our strong points as well as bringing additional services to the mix and the internal property management.

George, when you are saying selling noncore assets, does that imply assets other than medical offices, other kind of nonacute assets that--?

It certainly can, Rob.

You could have an ASC connected either in an MOB or stand alone.

You can have imaging centers.

Increasingly, I think you're going to see more and more wellness centers whether that's a wellness MOB or it's a separate wellness center with different types of diagnostic equipment and different types of maybe even alternative medicines.

You're going to see a radically different platform emerge in the next 10 or 15 years.

Those are the types of facilities that are best done by an outside long-term holder as Fred indicates like Health Care REIT.

And then a question about the senior housing development pipeline.

The -- I've read a lot about the kind of a dearth of development and certainly what's going on in the credit markets probably doesn't help a whole lot there.

Are you getting -- are folks coming to you looking for development opportunities since you were one of the few games in town?

What kind of -- you sort of cut out a couple times.

I guess primarily assisted independent CCRC?

Are the long-term care people coming to us for--?

Well, are folks who want to do the development which would be primarily the operators, are they -- since there's not a whole lot of development going on and you're doing a fair amount of it, are you getting inquiries from the operators?

Yes, of course we are.

And we'll get development opportunities as well throughout the spectrum of senior housing and acute care because we are with our capabilities, development capabilities and as Fred points out, too, even our property management capabilities once the projects are up and running, I think that when one can go to a one-stop shop company like ours and with, I think, our deserved reputation for being good partners, I think that we expect to see a lot more of that.

The way we look at it, is that people sometimes think development has greater risk.

In some respects, there's a counterpoint to that.

That is that the consumer is going to demand better care, better housing and different ways of delivering that and to not develop new platforms is perhaps over time a greater risk.

So I think the fact that they know that about us and that we're ahead of the curve as to where senior housing and healthcare has to go help us considerably.

Do you have a sense as to how big you like that pipeline to get?

We've always talked to the agencies and to the Street about being in the 15% level from time to time in terms of how much development we have outstanding.

It is time consuming to do it the way we do it, thoroughly with our own in house development group and construction monitoring group.

But given our size, that can be a fairly big number if we see the right opportunities.

That's all I had.

Thanks a lot.

We'll go next to Karin Ford, KeyBanc Capital Markets.

Good morning.

Two questions.

First, it looked like for every year, except 2008, that your development yields ticked up a little bit.

Is that a question of mix shifting or was there something going on in the economics to cause the yields to rise?

Just to clarify first, Karin, are you talking about the projected initial yields on the--?

Exactly.

On the forward conversion projection from what, the last quarter's numbers?

Correct.

My gut is, we actually didn't think that would be a function of, in part what happened at treasuries.

A lot of these are set at average initial yields of treasury plus a spread and then it would also be affected by any new deals that came into the pipeline.

Okay.

Fair enough.

Second question is related to the possible sale of Sunrise Senior Living.

I know they're not a tenant of yours, but does that change the landscape at all for you?

And is that something you guys might look at?

We have done work with Sunrise.

I think we did one of their first deals.

I think our position is that at any time there is an acquisition potential or development possibility, we look at everything.

We don't comment on anything specifically.

Okay, thanks.

We'll go next to Chris Pike, Merrill Lynch.

Sorry, we were having some issues here with the phone.

Our questions have been answered.

Thanks a lot.

Thanks.

(OPERATOR INSTRUCTIONS) We'll go next to Philip Martin, Cantor Fitzgerald.

Yes, just one follow-up question.

Health Care REIT's made excellent progress with the rating agencies over the last 6 to 12 months as you reported.

What in your opinion are the hurdles as it relates to further upgrades and how close is HCN in terms of those hurdles?

And are the rating agencies in any way, shape or form, in the way of your progress?

That's the best way to ask that question.

I'm certainly not going to say that the rating agencies are in the way of our progress, thank you, Phillip.

I would say we made really good progress.

It's been a multiyear process.

We have very good constructive relationships with all three.

I believe that we have an opportunity during the next year to hopefully nudge S&P up into the BBB flat category.

We're pretty pleased with being at BBB flat and we think that's probably about the right place for us.

Frankly, they've been helpful.

We've had a lot of interplay with each of the agencies in terms of where we go, what our strategies are, how we diversify.

It's extremely constructive.

Whether or not we would try to go beyond BBB is a little problematic right now.

I think that some of the leverage thoughts that the agencies have to get up into a higher level seem to us to be unduly conservative.

We've had a long term debate with them.

If in fact healthcare and senior housing and combinations become a more mainstream type of property type which we think is happening and that leverage and other constraints become a little bit more flexible, a little less rigidity in the thinking, then perhaps we would move further.

But for right now I think we're pretty pleased at BBB flat.

How are they viewing your development pipeline given that, well, just how are they viewing development?

First of all, all of them, I mean, all of them are very knowledgeable about healthcare and senior housing.

I think increasingly, everybody in the United States is increasingly knowledgeable about the need for different types of platforms.

So they have been very helpful that way.

I think to a large extent, our 30 plus years of development and with our own development company and with our methodical approach to it, and the need for new platforms I think if anything as long as we keep the development as percentage about where we have stated it to be, I think it's, if anything, a positive.

Okay.

Thanks for the color.

We'll go next to Geoff Dancey, Cutler Capital.

Hello.

I have a couple questions just in regards to the idea behind ramping up the acquisitions ahead of were you expecting I guess rising cap rates?

And if you -- I was wondering if you could explain your thinking behind that and also in terms of compared to your alternative use of cash, say, buying back the stock and whether or not you think the stock is say at discounts or has a value?

Just what your thoughts are on that.

In terms of acquisitions, it's just what -- we try to give the best information, our best guess as to what development and acquisitions we think we're going to do during the year, and we try not to be either unduly aggressive or unduly conservative.

We're trying to give you the best picture.

As we sat down for this call, we thought we had a good chance to move that acquisition number up.

In terms of the buyback of stock and while we discuss that from time to time, maybe, Scott, you'd like to comment on our thinking at least at the moment.

Sure.

I think we would point you to our overall investment and development pipeline remain very strong currently and we remain very committed to maintaining our investment grade rating so the additional leverage resulting from a buyback doesn't make great sense for us right now and we do think we're getting very good risk-adjusted returns and yields from our pipeline today.

So the potential buyback of stock is something that you guys are sort of always throwing around there or, I mean, is it--?

Unlikely in the near term.

Sure.

Okay.

Thanks a lot.

It appears there are no further questions at this time.

I'd like to turn the conference back over to management for any additional closing remarks.

We have no further comments.

We thank you all for participating in this quarter's conference call.

This concludes today's conference.

Thank you for your participation.

You may disconnect at this time.