Welltower Inc (WELL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Health Care REIT, Inc.'s first quarter 2008 earnings conference call.

This 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 to queue you up for questions.

I'd like to remind everyone that this conference is being recorded and would now like to turn the conference over to Ms.

Vicky Banker of the Financial Relations Board.

Please go ahead, Ma'am.

Good morning and thank you for joining us today for Health Care REIT's first quarter 2008 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 the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations [to] 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, Vicky.

We are quite pleased with our first quarter 2008 results.

As we reported normalized FFO and FAD growth of 7% and 9% respectively.

Moreover, our portfolio continues to perform quite well as coverage at the facility level was 1.99 to 1, with approximately two-thirds of our revenues derived from private pay.

We hope to drive the private pay percentage to approximately 70% by year-end.

We also continue to have a very diversified portfolio with our top operators comprising only 27% of our portfolio.

You'll also note that we are increasing our gross investment guidance by $200 million to a range of $1.1 to $1.4 billion, yet our net guidance remains unchanged at $700 million to $1.1 billion because we plan to accelerate the movement to a more modern, customer-focused facility base through additional dispositions.

Dispositions, as you know, allow us to recycle capital efficiently into preferred assets and demonstrates our financial flexibility.

We have on many occasions now discussed our goal of acquiring and developing real estate platforms that address the needs of the evermore-demanding customer.

In the senior housing and care side, we continue to believe that all components, including skilled nursing, assisted living, independent living and dementia, are excellent investments going forward.

We simply believe that combinations of some or all of these service levels tend to have more appeal to the customer driving higher occupancies and revenues.

And with longer lengths of stay, combination facilities in our judgment will also tend to be more stable over time than stand-alone facilities.

You will note that our new supplement breaks down our existing senior housing and care portfolio in two ways.

One is based upon the predominant service type; the other is based upon combinations in stand-alone facilities, i.e.

those facilities with multiple service levels are only one.

Our combination facilities currently comprise 28% of our portfolio; and upon completion of the development projects already underway, those combination facilities will approach one-third of our portfolio.

We currently have investments in 17 projects that meet the NIC definition of CCRC, i.e.

projects that include assisted living, independent living, and skilled nursing units.

Once rolled out in full, our investment in these facilities will total $519 million.

If we were to include all campuses regardless of whether SNIP units were included or skilled nursing units were included, our large combination CCRC-type projects would increase to 26 with a total commitment of approximately $1 billion.

Our commitment to combination platforms is evident based upon our first quarter investments as well as our development pipeline.

In the first quarter of '08, only 6% of our investments related to stand-alone senior housing and care assets.

44% related to combination CCRC assets, and 50% related to acute care facilities and medical office buildings.

Of the approximately $1.13 billion current development pipeline, $370 million has been funded through March 31, 2008, with $758 million yet to be funded.

Only 6% of the total development pipeline relate to stand alone senior housing and care assets.

73% related to combination CCRC assets, and 21% related to medical office buildings and acute care assets.

In the acute care space, MOBs are likely to be much more customer friendly with a wellness component and a one-stop shop and one-stop shop features.

In the acute care arena, the platforms are becoming much more customer friendly with the newest technologies and featuring minimally and non-invasive procedures, and we are committed to continuing to enhance the overall quality of our portfolio and believe the combination of high-end real estate, strong facility coverages, and excellent portfolio diversification should support an even greater multiple in the capital markets.

And with that, I'll turn to Ray Braun and Scott Estes for additional comments on our portfolio and financial results.

Ray?

Thank you, George.

I'll review investments to market our portfolio and the reimbursement outlook.

Please note we've created a supplement with our new disclosure that's available on our website.

Scott will provide some more detail about the supplement in his remarks.

During the first quarter, we completed $181 million of gross investments including $93 million of acquisitions at average initial yields of 8.8%.

We also funded $77 million in development.

We have 33 properties and 5 expansion projects currently underway with a total commitment of $1.1 billion.

There were $21 million of conversions during the quarter at average initial yields of 8.5%.

We did not have any dispositions during the quarter.

In terms of a market update, we continue to see good deal flow, attributable to our relationship investment strategy based on the opportunities we're seeing.

We've increased our guidance and Scott will review that during his remarks.

Turning to the portfolio, at the end of March, 69% of our portfolio was invested in senior housing and care, and 31% of the portfolio was invested in medical facilities.

We have 498 properties in our senior housing and care portfolio, with 56 operators and 37 states.

Payment coverage has remained strong at 1.5 for independent living and CCRC, 1.6 for assisted living and 2.3 for skilled nursing.

34 properties are in fill-up with an investment balance of $445 million.

Our medical facilities include 125 medical office buildings with 5.3 million square feet and 23 specialty care facilities with 1,581 beds.

Payment coverage for the specialty facilities were strong at 2.6 times.

We currently have four specialty care properties in fill-up with an investment balance of $85 million.

MOB net operating income increased $22 million in the first quarter and same store NOI increased 4.2%.

Occupancy declined slightly to 89% inline with the budget.

We project increased leasing activity throughout the rest of the year and expect occupancy to increase to 92% by year-end.

At March 31, 81% of our medical office NOI is attributable to properties on a hospital campus or affiliated with a hospital.

Looking at reimbursements, CMS released a proposed role for skilled nursing FY 2009 Medicare rates providing a full market basket update of 3.1% offset by an estimated 3.3% administrative reduction.

The final roll is expected after the 60-day comment period and will be effective October 1.

CMS also released the final roll for the long term acute care hospital reimbursement which includes a 2.7% increase in payment beginning July 1 slightly offset by an increase of a high cost outlier threshold or net increase of 2.5%.

Turning to Medicaid, most states are still in the process of finalizing budgets.

We will provide an update on our second quarter call with any significant information after the states release budgets at the end of June.

Given our strong skilled nursing payment coverage, we don't anticipate any material increase in payment risk.

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

Thanks, Ray.

Good morning, everybody.

As Ray and George said, we are pleased to introduce our new supplemental information package this quarter.

We've obviously added a considerable amount of information in response to requests from investors and analysts, and I'd like to quickly highlight a few of the new items.

First, many of you have requested additional detail on timings for acquisitions, dispositions and construction conversions, which can be found on Page 17 including average initial cash yields.

We have also added a lot of new portfolio data, including same store information, which is included on Pages 18-27, and we have added to our development disclosure to include development yields by property types and additional quarterly conversion estimates.

We believe this additional information will help investors to better understand our portfolio and we look forward to your comments.

Turning to earnings, our first quarter normalized FFO for fully diluted share increased 7% to $0.81 from $0.76 in 2007.

Normalized FAD for fully diluted share increased 9% to $0.76 from $0.70 in the comparable quarter last year.

Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income for common share.

We recently declared the dividends for the quarter ended March 31 of $0.68, or $2.72 annually, which represent a 3% increase above last year's rate.

The payment represents the Company's 148th consecutive quarterly dividend.

Taking a look now at our operating results, gross revenues including discontinued operations totaled $136 million for the first quarter, up 20% versus the same quarter last year, with 92% of gross revenues coming from rental income.

Our interest expense increased to $34 million from $32 million last year, primarily as a result of our convertible debt offering completed in July 2007 as well as slightly higher average borrowings on our line of credit.

First quarter G&A came in at $12.3 million, in line with our expectations.

I'd point out that first quarter G&A included $2.3 million of non-cash compensation expense related to accelerating vesting of stock and options, as is the norm in the first quarter.

Our total non-cash compensation expense during the quarter was $3.8 million.

At this point for the full year, we believe our G&A is tracking toward the $42 million level in line with our original expectations.

There were several other items of note during the quarter.

We had a non-recurring income tax expense of $1.3 million, related to the $3.9 million non-recurring gain from the sale of our warrant position in home quality management received in the fourth quarter.

We've historically had very little in the way of income tax expenses; but for clarity's sake, we have detailed this item as a separate line on our income statement this quarter.

One other item of note, we recorded a $1.3 million gain on extinguishment of debt from the pay-offs of $25.7 million of secured debt associated with four properties on which we were paying an average interest rate of 7.2%.

Moving on to the balance sheet, we ended the quarter with net real estate investments of $5.2 billion.

Our credit profile remains strong, as our leverage at the end of the quarter declined slightly to 48% on a debt to un-depreciated book capitalization basis due to the benefit from our March 2008 equity offering.

During the first quarter, our adjusted interest in fixed charge coverage remains strong at 2.9 times and 2.4 times respectively.

As of March 31, we had $432.5 million drawn on our $1.15 billion line of credit, leaving $717.5 million in availability.

Our debt maturity schedule is currently in great shape.

During the quarter, we used our line of credit to repay $42 million in 7.625 senior notes which matured in March, in addition to the previously mentioned $26 million in secure debt paid off during the quarter.

At this point, we have only $76 million maturing through year-end 2010.

In terms of capital for the quarter, we completed a 3 million-share equity offering in March for net proceeds of $119 million, which we were used to pay down our line of credit.

None of the potential over allotment shares are exercised in connection with this transaction.

Under our dividend reinvestment plan, we issued approximately 452,000 shares for $18.5 million in proceeds during the quarter.

Now, I would like to wrap up with a discussion of our 2008 guidance.

As George and Ray mentioned, our relationship investment strategy has produced a very strong pipeline of new opportunities.

We have increased our acquisition guidance and we have also increased our disposition guidance to reflect our plan to recycle capital through selective asset sales.

We now expect acquisitions in the range of $700 to $900 million and dispositions of $300 to $400 million.

Our net new investment guidance remains unchanged, but we have increased our growth investment guidance to a range of $1.1 to $1.4 billion.

It's important to note that we believe we could realize gains of as much as $100 to $200 million from our projected dispositions this year which should allow us to be somewhat less reliant on capital markets transactions relative to our original 2008 outlook.

More specifically, we have reduced the average shares outstanding in our current guidance to 90.5 million shares from the previous 92 million.

The combination of the increase in our investment guidance forecast and the decline in our projections for average shares outstanding have enabled us to increase our normalized FFO and FAD guidance.

Our projected 2008 normalized FFO range has increased to $3.30 to $3.38 per diluted share, representing strong 6% to 8% growth versus last year, while our normalized FAD guidance has increased to the range of $3.04 to $3.12 for diluted share, representing 4% to 7% year-over-year growth.

With that, I'll turn the call back to you, George.

Thank you, Scott.

Now let me conclude with some comments relating to our investment programs and our success in generating attractive investments with solid returns.

During the last 5 years, we have made over $4.7 billion of new investments, again clearly indicating our success with our investment program.

And a great deal of our investment success is driven by our relationship investing strategy that enables us to source transactions with quality operators regardless of market cycles.

This multiyear multi-facility approach with a quality operator essentially converts the operator into part of Chuck Herman's marketing team, which we already believe is the best in the sector.

The operator understands our underwriting standards and knows capital will be available for conforming projects.

In the last two years alone, we added 25 new relationships under these types of programs.

Our lines of credit have over $2 billion of availability for these key quality operators; and largely because of these relationship programs, our shadow pipeline stands at approximately $3 billion, broken down roughly two-thirds senior housing and care and one-third acute care and medical office buildings.

And we believe this approach essentially eliminates any need to engage in, be dependent upon large auction transactions to grow our portfolio.

Another key contributor to our investment success during the last several years has been our commitment to the full spectrum of senior housing and healthcare.

By rolling out our relationship investment programs to a broader market that now includes hospitals, ambulatory surgery centers and medical office buildings, we have effectively doubled our previous investment trends.

And that ability to provide -- our ability to provide full service solutions through our investment programs as well as our development services and property management capabilities significantly enhance our ability to market to healthcare systems and operators.

These programs and capabilities together with the credit dislocations that have forced many lenders and investors out of our sector give us great confidence that we will continue to be successful in making accretive investments in quality senior housing and healthcare projects.

And with that we're now open for questions.

Thank you, sir.

(Operator Instructions) We'll go first to Rich Anderson with BMO Capital Markets.

Thanks and good morning, everybody.

Hi, Rich.

Rich

I think it's sort of curious how you raised your acquisition guidance and your disposition guidance at the same time.

Usually it's either one or the other in response to cap rates movements and what not.

So how would you sort of reconcile that?

What are you seeing in the cap rate -- from a cap rate perspective and any sort of color on how that might have influenced this decision to change that guidance?

Well, cap rates, Rich, have been generally tweaking upwards, probably a little slower than really the market should demand but that happens in every cycle.

It just so happens that we have been making a decision for the last two or three years to commit to combination projects and have opportunities to disclose of certain assets we believe this quarter or the next, and we are going to act on that, we hope.

And at the same time, we are seeing a great deal of activity through Chuck and his group, Brad and whatever, and we're very, very bullish about our ability to bring home a lot of transactions.

So it just so happens that they hit at the same time and it might be convenient, but we think it is very favorable for the Company and repositioning our portfolio toward combination facility as well as more acute care and combination facilities.

Ray or Scott, you want to add anything?

No.

No.

Good.

So why the aversion to the capital markets, particularly your equity?

The stock has done very well.

I don't think anyone would misunderstand the use of cap, your stock to fund a pretty heady investment guidance for 2008.

Why are you not thinking in terms of equity?

I think we'll think about all of our capital raising possibilities as we move on.

Our ability to recycle assets and use cash we think is a great opportunity.

We are going to keep our leverage, debt and equity in the range of BAA to BBB flat kind of ratings and try to pick the best way to raise capital from time to time.

Scott?

No.

I think that's great.

And I know the focus is on combination facilities; but in terms of the medical office portfolio, do you see that also going up or do you sort of like it where it is as a percentage of your total portfolio?

That -- we're never able to tell you that we're going to be at 22, 25 or 31.

We stand on an MOB portfolio because all of us to some degree are opportunistic.

Over time, we are pretty happy with the MOB portfolio around a quarter of our portfolio and Fred Farrar and Dan Loftus and our whole team are dedicated over the next 5 to 10 years to having the best MOB platform in the country, and I think we'll achieve that.

So we're very pleased with our MOB portfolio.

We'd like though to have a reasonable balance among all of our different asset values.

Do you have a comment on what the [H] HRP transaction, I'm sure you didn't get a look at that portfolio, something tells me, but what do you think of the pricing?

Scott, do you want to comment?

I guess the pricing would be I think in the general range of what we're seeing in the MOB space right now, and generally we're also looking at the 7% to 7.75% range in terms of the initial cash NOI in the transactions that we're looking at right now.

Okay, and the last question is on the SNF fund, on the SNIP reimbursement comments from CMS, would you characterize that as a disappointment relative to what your internal expectations were at this point?

Well, we always like to see it going up more.

But did you expect a little bump upwards?

We expected what they did, the inflationary increase and the administrative tweaking.

Okay, thank you very much.

We'll go to Kristin Brown with Deutsche Bank.

Hi, good morning, guys.

First of all, thank you for the added disclosure; it's really helpful.

And then my first question is are you still exploring alternative capital sources like JVs?

We are always looking at JVs as a capital-raising tool.

Probably more importantly, we look at JVs as a way to do certain transactions that are very appealing and perhaps done best within a JV situation.

And we're always also looking at JVs as always to expand our relationships with key financial partners who we'd like to do business with.

So we don't always do it simply as an alternative capital markets opportunity.

Okay, and then just in terms of the housing impact on the CCRC, so far, you have described the impact as pretty minimal but does this make you biased against buying CCRC facilities versus rental in terms of acquisitions and development?

It's Ray, Kristin.

We're seeing some slight slowing of absorption in some of our projects but we still believe that as a model long-term it is going to be a good asset value.

Okay, and then on Page 22 of the supplemental, in terms of revenue and expenses for occupied units for independent living and CCRC, I was just wondering why there's such a big gap between the same store portfolio and the stable portfolio?

Sure, we have a relatively small bucket and I think the difference there, Kirstin, if you look, I know in the second quarter of 2007, there was a considerable addition to just the stable bucket which causes the disparity between those two numbers.

One includes a higher SNIP component and skilled nursing has obviously higher revenue per occupied unit and also higher expenses.

So that's skewing our same store numbers upward a little bit, but it's really just what comprises the two lines there, stable versus same store.

Okay, thank you.

Sure.

We'll go to Chris Pike with Merrill Lynch.

Mr.

Pike, your line is open.

Please go ahead.

Hi.

Good morning, everybody.

Hi, Chris.

Hi, Chris.

Scott, great job on this.

I'm sure a lot of other folks helped out to put the supplemental together.

Thank you.

Thanks for taking my questions.

I guess back to Rich's question, let me ask it a different way.

Where do you see the spreads between buying and selling assets today versus when you originally cast your net investment guidance back a couple of months ago?

Have they widened such that it's more accretive, tightened?

Can you just categorize that for us?

I think that on the acquisition front, Chris, obviously, the market has been in a shake out period for at least 6 to 9 months and there probably hasn't been too much change in our original expectations on the acquisition front.

I think we have been a little bit more proactive on the disposition front, and really the two ways we're thinking about dispositions are opportunities to -- one category is when an operator has approached us and it didn't in their best interest to repurchase some facilities and from our perspective it offers an opportunity to harvest significant gain in a portfolio; and I think the other way we're looking at disposition is if we can recycle capital but improve the overall quality of the portfolio and move our mix to the -- George mentions the customer-friendly combination facilities that will improve our overall portfolio, that's the other way we're looking at dispositions right now.

So would you quantify, let's say, the spread between buying and selling, 100 basis points, 125 basis points on aggregate?

I don't think we really look at it that way, Chris.

I think on the disposition side we're looking at opportunities to harvest gains and redeploy it accretively.

Okay.

And as you move from one asset class to another asset class, it compounds the difficulty of answering your questions.

Yes, the mixed issue is probably very difficult to get through.

The MOB vacancy, what drove that?

Fred?

Are you on, Fred?

Yes, sure.

Great.

I don't know if you want to take that.

We did have two large leases that didn't renew in the first quarter as within our forecast but I don't know what Fred would like to add.

Yes, we had a couple of properties transition from master lease.

If you look at the supplementals, we had 177,000 square feet expiring in the quarter; we also have 212,000 square feet expiring next quarter.

And so our forecasts are that with those levels of renewals or expirations, we are forecasting that it continues to dip slightly before rebounding by the end of the year.

We're on the verge of executing a 26,000 square foot lease hopefully this week that will help the portfolio occupancy.

And that's to existing customers or tenants or outside your network?

No, it's an expansion to an existing customer.

Okay.

And I guess, with respect to the MSA concentration chart, I guess you guys provide, I forgot what page it's on, across various concentrations in the U.S.

Maybe this is another difficult question given how vast the portfolio is, but I guess if you were to look at your same store metrics, if you were to look at your coverage and your occupancy and so forth and so on and you were to bucket those statistics across your concentration away from the top 31, top 75, top 100 and so forth, would there be significant differences in how each of those buckets look from an operating perspective?

That is a difficult question.

But just directionally, I mean, you guys know your portfolio better than anyone.

I got to think that you should have some type of feeling about the relative performance whether it's "in a top 31 market versus a top 100 market."

I think our focus is more matching the platform to the market, so if we get that right, we tend to see comparable performance.

For example, we have a rural portfolio of assisted living but that's fine because the buildings are right sized for the market.

We don't really think about it that way.

Okay, so then it would be probably fair to say that the statistics should be comparable across each of those concentrations regardless if it's a top 31 market or a top 100 market?

We can look into that and give you some more detail on it.

Yes, the only reason I ask is because in analyzing the NIC data, and looking at the NIC data and applying it to let's say your portfolio, or let's say some of your peers' portfolios, all I'm looking at is the top 31 markets and here you have 42% of your assets in the top 31 markets.

I don't want to have any misinterpretations in terms of fundamentals matching between your portfolio and what we get from NIC.

That's the only reason I'm asking the question.

Sure, and we can drill down on that and generally we're pretty much inline with what you see in NIC.

Okay, and I guess, George, given your relationships with your existing operators and your ability to push some of your investment guidance, how would you describe your current relationship with Tenet, it's your top office name, especially given the fact, I guess they just announced a couple of days ago, they're looking to divest 2.2 million square feet of MOB space.

The Tenet relationship largely came to us through Rendina and there have been a lot of changes not only at Tenet but also in Rendina too and, Fred, I don't know if you want to expand on that; but we frankly, Chris, are never surprised to see the inevitable changes within different health systems which are continuously repositioning themselves.

So I mean our job and [Mike Noto's] job at the property management side and the development services group led by Steve Buckridge is to continuously be in front of different health systems as they expand, they contract and, therefore, our relationships change.

Fred, do you want to comment?

Yes.

Tenet's a very large institution.

We tend to drill down on what's happening at the specific hospital; and if you come back, while they are our largest tenant at 343,000 square feet, that's not a lot of square footage.

We actually have projects in our pipeline that are 150,000 to 250,000 square foot individual buildings, so you'll see a different make up of this as those come on line.

Thanks for that.

I guess given your relationship or given that the Tenet exposure did come from the Rendina, does that give you guys any additional foresight into these assets or are you a little familiar, more familiar with some of these MOB positions relative to let's say some of your peers, or given the scale, how you just described it, it really makes it a tough thing.

Well, you've actually hit on a point that it is part of our business initiative, and that is to make sure that through managing our own properties, we are staying as close as possible to our system partners where our assets are.

And we are in the process of revisiting all of those relationships as we speak.

Great, thanks a lot, guys.

Thank you.

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

Good morning.

I just have a couple of things.

I wanted to get a little more color into who's financing or how people are financing the things that you're selling.

Because you're sort of telling us that you can find more investments, I assume that it's partly because the capital markets are tighter so you're [sounding] up my sensors to what I guess I call strategic buyers, the operators in most cases and where are they kind of getting financing?

I think its bank financing and equity.

So it's more sort of ones and twosies that you're selling rather than larger chunks to?

The three large packages that we think we have are going to go, one, to bank financing in one case; two, some combination of debt and equity in another; and then to some nonprofit financing in the third.

So, Jerry, frankly, it's all over the map.

And I guess the only surprise, I suppose, to some of you is that people who are pretty good quality regional operators or regionally focused operators, for that matter, have the ability to continue to do this, but they do and we're looking forward to the dispositions.

And again I think it's certainly less combo facilities, but is it most are primarily SNIPs or senior housing or sort of the mix of both of them?

Well, we'll announce it once we get them done.

Okay.

But clearly our goal is to move toward combination projects and for that matter to increase our acute care space as well as keep our MOBs where they are at least.

Okay.

And then just a followup on the MOB stuff.

Are the rents rolling up, rolling down as you sort of move some of these leases off?

I just want to get a little color there.

Fred?

Yes.

It actually depends property by property, Jerry.

On the whole, when a master lease expires, we generally see some decline in the rents.

But on the properties that aren't subject to master lease, we're seeing increases in rents.

Okay.

So on the space, the big chunks of the space are rolling, we need to build in both an occupancy decline until you kind of refill but also the rent levels might be a little lower as we go forward?

That's correct.

Okay.

And then last thing and I think you touched on this.

But I just want to come back to it a little bit.

I mean we've now had a number of the operators' report.

Just a little bit more color on sort of the whole sort of housing market, flu season, just in terms of how it's kind of affecting occupancy and stuff.

What's your sort of take, and, again, I'm really not so much looking for a kind of (inaudible) historical that you reported, but just your sense of where things are now?

Yes.

I mean, generally two things affect the metrics.

One is operating performance of the building, obviously, and second is what assets are classified in each portfolio.

And we don't see any -- based on our asset management reports, any deterioration in the operating environment and some of them are around the numbers of volatility due to classifying different assets in our portfolio.

And just even more broadly generalized in the operators because I know you stayed fairly close to your operators.

People seeing - I mean, we've been seeing some slippage in occupancy from flu, some slippage in occupancy in the housing market, just your characterization overall, some of that temporary?

Do you see the housing market being more of an issue?

Just any color there you could give us would be helpful.

Our operators are reporting that there's a slight slowdown in traffic, but there hasn't been enough of a trend yet for us to draw any conclusions.

Okay.

And flu issue, was that sort of a real meaningful impact or you don't really notice it that much?

Yes.

Occasionally flu can hit a building and cause occupancy declines from time to time, but it's not something that's pervasive throughout the portfolio that [we move this business].

Okay, all right.

Thanks a lot.

(Operator Instructions).

We'll go to Rob Mains with Morgan Keegan.

Good morning.

One numbers question for you, Scott.

The guidance for capital expenses I think was about the same.

It was pretty low in the quarter.

Is there any particular reason why it's going to ramp up a lot?

It's really and its actually is -- you can see our projections there in the medical office section on Page 26 -- it is obviously back-end loaded and it's really due to timing of some build-out as we accelerate some leasing activities toward the second half of the year.

Okay.

And then since we're near the end of it, Page 29 where you've got the development project conversions, I assume that you are putting those incentives, I just want to confirm.

If rates go up, you're projected yields go up as well.

Right.

Yes.

That fluctuates, Rob.

Really, we set the initial yield at the time of certificate of occupancy based on a spread over the comparable treasury at that time.

So when we show the chart, it might move slightly as rates move.

But, again, it wouldn't ultimately be set in most cases until certificate of occupancy.

Okay.

And then sort of going after the same question, I think, about the third way on this call.

The issue about entry fee buildings.

If I remember right, Ray, last call you had suggested that of your developed entry fee buildings, you had only one that you felt was lagging where you wanted it to be in terms of lease up, the other three being -- despite concerns about the real estate market is going to be doing okay, would you still characterize your lease up with those buildings that way?

Yes.

I think that's fair, Rob.

But, yes, that's right.

[Before] entrance fee communities and fill ups, about $110 million balance and really only one is of any concern, and it's really more just in budget of move-ins.

So you're seeing a little bit of absorption maybe there but I think -- I'd also point out, we do have two stable entrance fee communities right now and we just looked at their coverages and they're at 1.34 times and the occupancy is 95%.

So it's a little bit in how quickly they fill, but once they get there, they should - where the trends are, I think they would be all right.

The particular facility is one that we purchased knowing it was in a frankly, a tough housing market.

And it is going to be part of a package that will ultimately be comprised of 10 CCRCs or CCRC look-alikes.

So we felt pretty confident going forward and we're not that surprised at all with the slowness of fill in that particular facility.

It's a very good piece of real estate that ultimately will be just fine and it's part of a larger package.

Just make sure I got that right.

You're doing another nine in the same market?

No, we're doing with the same operator.

Same operator.

Okay, got you.

All right, fine.

That's all I have.

Thanks.

(Operator Instructions).

We'll go to Philip Martin with Cantor Fitzgerald.

Good morning, everybody.

Hey, Philip.

I like the supplemental but did you have to add your pictures?

That's just a real additional enhancement, Philip, that we knew you'd like.

Okay, because you're going to open yourself up for analysis now of your photo.

And Ray looks a lot younger there.

My first question comes from -- in terms of -- what -- can you talk specifically, George, about what's driving acquisition growth?

I mean are they operators?

Are they the good supply-demand fundamentals and the operators see very good growth opportunities?

What types of properties are you targeting in this incremental acquisition growth?

I just want a better feel for specifically what's driving that.

I think, Philip, this is a very opportunistic market.

Okay?

You don't have as much capital in there.

Some people frankly even within our space have pulled back a little bit.

I suppose to be conservative.

We have lines of credit relationship financing programs where people are finding very good transactions.

We're even finding some CCRCs where there have previously been bond issues that perhaps can be purchased for any number of reasons.

I think I indicated, too, in my comments that as you look at either the development pipeline or you look at our activity for the first quarter, which isn't necessarily going to be emblematic of the rest of the year, that only 6% of our portfolio or our acquisitions or our development relates to stand-alone facilities.

So we're obviously backing a lot of people who want to do combination facilities and were finding a medical office buildings with us or are developing or acquiring acute care hospitals.

So it is really all over the map.

And I really attribute it to the fact that, as I said, our relationship program gives us an underlying base that essentially allows us to belie different market cycles and, moreover, to reach our platform from lower-end senior housing all the way through the most acute care hospital.

It just gives us a tremendous reach and then you add Buckridge's development services growth and [Noto's] property management group.

And we have a lot to sell right now.

And we have a lot of people out there and a lot of people are coming to us with very opportunistic packages.

So I'm very pleased with our results.

Would you be surprised if your growth pipelines that -- well-- would you be surprised if you didn't increase your acquisition and development targets throughout the year here as your broader platform just matures that much further?

The broader platform was very, very helpful but it's also true that if one looks at CCRCs, especially if it's a buy-in deal, one has to spend a great deal of time and attention to make sure that they work their somewhat more sophisticated modeling projects.

And then, two, the acute care space moves at almost a snail's pace.

So I don't want to say we were going to increase it necessarily beyond what we just did.

This year, I guess, it's a possibility, but I guess I'm just very pleased with our direction and our momentum.

Okay.

And in terms of this new incremental growth, again, you touched upon it a little bit.

Is it a mix of kind of new relationships and existing relationships or is it primarily with existing relationships?

Well, I mentioned that it is a result of our activity in relationship financing or investment program that we added 25 new relationships just during the last two years.

So those continue.

Some fall by the wayside if they just got into maybe their ability to the point where they can only manage that number of facilities.

And then the acute care space, maybe the OMB space as well, tends to be a little bit more -- a little less relationship driven so they can be more sporadic.

They can be more one-off transactions and one is never quite sure when we're going to land them and when not.

It's just reaching out, being there and talking about our ability to be a good relationship partner.

So it's really hard to go beyond that, Philip.

Ray, you want to add?

Yes, I think it's a mix, and we continue to develop relationships with quality operators.

Okay.

I should add one other thing.

We were talking about Tenet when -- I think it was Chris who mentioned the Tenet relationship.

I mention that these are constantly increasing or decreasing, getting better, getting worse for a while as health systems expand or contract.

I just will tell you that I'm very pleased with all of the people that those of us who market in the acute care space are meeting and what kind of programs we can put in front of them, especially with the property management capabilities as well as the development services capabilities we have to bring to the table.

And we are definitely forming new relationships with other healthcare systems and I'm very pleased directionally with that as well.

Well, it goes back to the CCRC and the combination platforms.

Can you talk a little bit about how this model has changed?

I mean obviously a lot of us have seen the evolution of the CCRC and the private pay models over the last 10, 15 years.

But how has that changed?

I know in terms of consumer awareness, we're seeing much more consumer awareness out there, but how has it changed?

I mean there are complex properties.

They're obviously more challenging.

The operator -- are you finding enough operators that know what they're doing and are they up to the challenge of managing a fairly complex community like this?

Well, I think they are or else we're not going to back them.

We do think that some people, again, fail because of development risk, if it's not an acquisition, as well as the different fill-up profiles for the components within a CCRC make it, as you say, a much more sophisticated project.

On the other hand we have -- I think the last time I looked a ratio 40% or 50% of our portfolio was still rental CCRCs which, again, decreases somewhat the complexity of the analysis.

But we're generally very pleased and I think Ray answered the question about the housing downturn and the effect on the buy-in projects.

You're probably moving a little more slowly but we think over time the CCRCs, whether rental or buy-in projects, are the place to be.

Combination projects, the larger ones especially are definitely the place to be.

And you asked how are they changing?

I think every year we see more and more of our CCRC and larger combination operators meeting together, seeing what other people are doing and there is a profound movement toward more and more personal choice, the customer driving the types of services that are there, the advent of really terrific wellness programs, exercise programs, et cetera.

This space is clearly being driven by the consumer, Philip.

So it is just taking off in terms of the types of amenities that people want today, let alone in the baby boomer set.

Another thing I'd add, George, is I think one change in the model with the healthcare benefit is no longer included.

So there's less actuarial risk in the models being developed today.

Okay, okay.

Now, I know your initiative to grow your relationships with larger systems both not-for-profit and for-profit, is that also driving your increased interest in the CCRC or combination platforms?

Are they interested in this product in terms of their systems?

Would you repeat that question?

I guess I'm -- I know you're looking to grow your relationships with large systems both for-profit and not-for-profit.

How interested are they in these large CCRCs, combination senior living platforms?

Do they want that as part of their system?

I couldn't give you a universal answer.

We run into systems who could care less about it, who don't even think it's necessarily that good a feeder even if they're right next to the health system, which I tend to disagree with, by the way.

And then there are others who think it could be great to essentially build a smaller community that would include commercial CCRC, maybe active adult housing as well as a health system in the same proximity that could easily be out in the suburbs.

So frankly it's all over the map, Philip.

Okay, okay.

My last question for Fred on the hospitals.

The two vacancies that cropped up here and then, of course, the Tenet portfolio here and their MOB strategy going forward.

Net-net, are these going to be upside opportunities for all of you?

I'm not sure I fully understand the question.

Well obviously there's a risk here with Tenet and potential vacancy in that HCN portion of the portfolio.

Are these well-located enough to see some upside opportunities if in fact there is some vacancy that crops up with those assets?

Yes.

Phil, we've been involved in Tenet assets for about four years now.

And as Tenet periodically divests of hospitals and/or they divest of MOBs, the strength of the individual hospital has been the critical view.

A lot of these hospitals are in Florida, and that market is just very strong.

So it comes down to an operator has multiple buildings and as long as these hospitals are strong, there's not an issue associated with the medical office buildings, the performance of the individual hospitals.

With respect to the divestiture of the portfolio, if the assets are on campuses where we already have buildings, then someone will be buying that and attempting to deal with what its occupancy is, but we think our buildings are well positioned on strong hospitals.

Okay.

So potential downtime, if it occurs, you would expect that to be pretty minimal and rents to remain the same if not move a bit higher?

Yes.

That's fair.

Okay.

Okay, thank you very much.

(Operator Instructions).

We have no other questions at this time.

I'd like to turn the call back to management for any additional or closing comments.

We'd just like to thank people for participating, and Scott will be available for additional time now if there are clarifying questions.

Thanks very much.

Thank you.

That does conclude today's call.

Again, thank you for your participation.

Have a good day.