Welltower Inc (WELL) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the second quarter 2009 Health Care REIT earnings conference call.

My name is Brandy and I will be your conference operator today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions) As reminder, this conference is being recorded for replay purposes.

Now, I would like to turn the call over to Mr.

Jim Bowe, Vice President of Communications for Health Care REIT.

Please go ahead, sir.

Thank you, Brandy.

Good morning everyone and thank you for joining us today for Health Care REIT's second quarter 2009 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'd 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.

Certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Factors and risks that could us cause actual results to differ materially from those in the forward-looking statements are detailed in news release and from time to time in the Company's filings with the SEC.

I'd like to now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT for his opening remarks.

Please go ahead, George.

Thanks very much, Jim.

I want to spend my time today commenting generally on our execution during these tough economic times.

First, on capital raising, we raised in excess of $1.7 billion of capital during the last 18 months.

The amounts included $1 billion of equity, $133 million of secured debt, and $525 million of non-core asset sales.

The average price per share on the equity raises was $42.77.

The rate on the secured debt was 6.1%.

And the asset sales produced $192 million of gains.

We are very pleased with our ability to raise this attractively priced capital in these times.

There are obviously certain important implications.

One, we enhanced our liquidity.

We delevered our balance sheet.

And from a portfolio standpoint, the sales of non-core assets together with strategic acquisitions and developments allowed us to continue repositioning the portfolio for the future in new, customer-centric properties.

We also continue within the portfolio to benefit from strong portfolio management.

One of the really important factors for us, so we have maintained our diversification with our top five operators comprising only 24.2% of the portfolio and the top 10 comprising only 37%.

Scott will discuss performance more specifically within the senior housing and care sector.

But I'll make this general comment, that operators have performed very well in this tough environment.

The recent results from Brookdale were quite impressive.

Our operators are optimistic about future occupancy trends in light of the very limited construction activity.

I think the message is quite clear, that the senior housing and care sector has been very resilient in the face of significant economic and housing difficulties.

To the CCRC area, we reported in our last call an increase in presales and move-ins in the first quarter with an uptick in operator optimism.

At that time, the stock market improvement appeared to be the key driver.

Today, the stock market improvement continues with some signs of a housing market recovery.

And while no one expects the housing markets to improve rapidly, given the unemployment numbers, the increase in sales and prices of new single family homes and housing starts are very positive data points.

Let me mention a few positive signs within our entrance fee CCRC portfolio.

Currently within our open CCRCs, there have been 97 move-ins in 2009 versus a budget of 96.

Tours and attendance at other educational and marketing meetings have picked up noticeably.

Many earlier prospects who had walked away from these facilities have come back for a second, third and fourth look.

We believe that our operators have in place solid marketing and sales efforts, so that increased volumes should translate into sales momentum in the next several months, absent a further economic correction.

With respect to these open CCRC projects, deposits and move-ins were up in the second quarter, a trend that continued, if not increased in July.

Our largest operator has 23 move-ins scheduled for the next six months with an additional four or five in the process of scheduling.

This appears to be a trend that is occurring throughout the CCRC portfolio, we are awaiting additional data in the next several months to confirm this trend.

Finally, the rental component within CCRCs is doing quite well.

Overall, the rental components' occupancy is 68%, with our largest operator's rental occupancy currently standing at 76% and I should point out that this particular operator believes that the rental occupancy will be over 90% by year end.

As I said earlier, we're not suggesting that the housing market issues have been resolved or that sales of entrance fee units will accelerate rapidly.

However, there is a large increase in traffic and a strong sense of optimism within our operator base.

As you know, we believe that over time seniors will be more attracted to larger communities with more amenities such as CCRCs.

Moreover, the pricing power for attractive high-end senior housing should be very strong in the next three to four years.

Just a word on medical office buildings.

In the MOB space, we did experience some integration pains during 2007.

But we've added key personnel to our property management team, refocused the organizational structure to add more accountability, commenced an effort to sell certain non-core MOBs and acquired or developed state-of-the-art larger medical office buildings.

And John Thomas, head of the medical facilities group, will be available to discuss the MOB space during this call.

Again, briefly on development.

Our development projects are proceeding quite well with many coming in below budget and ahead of schedule.

These high quality assets will be great additions to our portfolio and carry an average initial rate of 8.8% and we believe that these returns are solid in light of the stickiness of cap rates during the last years, as well as a relatively small number of acquisition opportunities during that period.

I would also add that we match funded, if you will, this development with attractively priced capital as well during this period.

So general comments on the portfolio.

We're pleased with our efforts in repositioning the portfolio.

We have always focused on the drivers of change in healthcare and senior housing and the results and changes to the real estate platforms that are required.

Next up for us is, as the markets have improved, our liquidity has largely been assured and the capital markets are clearly strengthening.

We believe we are moving beyond the inflection point between preserving liquidity versus deploying capital.

For the last 24 months we have maintained dialogue with excellent existing and future operators and health systems, waiting for the capital to become more readily available at reasonable prices.

We are now actively seeking selective, high quality investments with seasoned operators.

We have positioned the Company carefully during these difficult times and are prepared to be very active as we enter the new growth phase, as we were in 2001.

At this time, I will now turn the podium over to Scott Estes, our CFO, for a brief financial and portfolio overview.

Scott?

Thanks, George and good morning everyone.

Second quarter earnings were in line with expectations and the Company's current liquidity position remains strong.

Our $888 million of cash and line of credit availability is enough to fund all of our current development and debt maturities through mid-2012.

I would point out that we are managing our debt maturities under the conservative assumption that both our $340 million convertible debt, putable in December 2011, and our $395 million convertible putable in July 2012 are put to us, although by no means is this a foregone conclusion with our stock now trading only 10% to 15% below the respective conversion prices.

If our converts are not put, the current $888 million of availability covers virtually all of our unfunded development and debt maturities through year end 2012.

We have also increased our secured debt expectations for the remainder of 2009 to approximately $300 million, which remains an important source of attractively priced capital.

This secured debt plus additional asset sales later this year should further enhance our liquidity and position us to begin to capitalize on select senior housing and medical facility investments, should they become available.

Turning to the details of the quarter, we completed a total of $99 million of net investments.

Gross investment activity of $178 million was primarily ongoing development funding with minor capital improvements and some funding on existing loans.

Dispositions of $79 million were a combination of loan payoffs and 13 property sales.

Five of these disposals were free-standing assets as we continue to prefer combination properties with multiple service types on the same campus.

These sales generated $11 million of gains during the quarter and as George mentioned we've now generated nearly $200 million of gains on asset sales over the last 18 months.

Turning to our current portfolio, it is performing well in a challenging environment.

I'll start off today talking about our development projects.

We now anticipate completing a number of projects earlier than previously expected, and have increased our projected development completions by an additional 125 million during 2009 to a total of $662 million.

Our current amount of unfunded development has declined to only $459 million, as we converted another $175 million of construction projects in the quarter.

I would also like to highlight what we believe to be significant security supporting our development pipeline.

First I'll comment on the security behind the $565 million of acute care and medical office projects which represent 47% of our $1.2 billion in projects underway.

Importantly, 91% of this balance is invested in projects sponsored by investment grade rated health systems and our medical office buildings are currently 87% pre-leased.

The remaining $624 million or 53% of the development pipeline is comprised of senior housing assets.

100% of these projects have either a personal or corporate guarantee and over 80% will roll into master leases.

So with nearly $700 million in expected project completions this year, and over $500 million expected to be completed next year, our development exposure should decline significantly.

We remain excited about the quality of these assets and believe our overall portfolio in terms of asset quality and longevity will be greatly enhanced as a result.

Now, in regards to our senior housing and nursing portfolio, payment coverage remained relatively constant in the most recent quarter.

Our assisted living and independent living coverage came in within 1 basis point of prior quarter levels while skilled nursing coverage declined 3 basis points but remains quite strong at 1.6 times after management fees.

I think this is very positive news in the current environment.

On the occupancy front, we continued to see declines in independent and assisted living with current occupancy at 89% and 88% respectively.

Skilled nursing occupancy stands at 84% but did increase slightly from the prior quarter.

Despite the occupancy declines in independent and assisted living, several of our larger operators have increased profitability through price increases and expense reduction initiatives.

Importantly, this has resulted in a sequential increase in EBITDAR margin versus the prior quarter for both our stable independent and assisted living portfolios resulting in fairly consistent property level rent coverages.

For our entrance fee communities, some operators are faring better than others but in aggregate we are still on track with our revised move-in budget for 2009.

As I mentioned last quarter we have dedicated analysts monitoring this portfolio and reporting to management on a weekly basis.

As George discussed, year-to-date through July 31st for our open entrance fee communities we now have a total of 97 move-ins versus our revised budget of 96.

The non-entrance fee or rental component of these buildings continue to fill and on average are 68% occupied as of July 31st.

We are encouraged by this news as well as by the positive data emerging regarding the economy, housing market and the stock market.

Finally, I will provide a brief comment on our unstabilized or fill-up portfolio.

During the second quarter, we had four properties move out of the fill-up portfolio to stabilized assets.

And at this point, we expect to move another five projects to stable from fill-up during the third quarter, with an investment balance in excess of $80 million.

Turning to our specialty care and medical office portfolios, our specialty care portfolio continues to perform well with payment coverage over two times after management fees.

Portfolio coverage, occupancy and payer mix changes this quarter were primarily due to payoffs we've had thus far in 2009.

I would also highlight that on page 19 of the supplement, we have changed the presentation of the specialty care assets to provide some additional detail on our 14 long-term acute care hospitals, seven acute care hospitals and five in-patient rehab facilities.

Our core medical office portfolio, which excludes assets held for sale, also performed in line with expectations.

During the quarter, our core MOB portfolio generated $20.7 million in NOI, had strong tenant retention of 83%, and ended with occupancy of 90.6%, representing a 40 basis point increase versus the prior quarter.

We now project that our core MOB portfolio will generate NOI of approximately $84 million to $85 million for 2009, representing a decline of 1% to 2% versus last year.

Our tenants continue to sign leases with terms that are approximately one to two years longer than we had budgeted for this year and our future leasing prospects remain encouraging.

Driven by our incremental leasing expectations through year end, we're estimating that our core MOB occupancy will finish 2009 between 91% and 92%.

Lastly, turning to financial results, second quarter normalized FFO of $0.80 per share declined 6% versus the previous year but was in line with the Wall Street consensus forecast.

Normalized FAD of $0.76 per share declined 7%.

These declines are generally a result of the significant capital activity completed over the last 12 months which included $874 million in equity, and $133 million of secured debt issued in April.

Regarding our dividend, we recently declared the 153rd consecutive quarterly cash dividend for the quarter ended June 30th of $0.68 per share.

As I mentioned last quarter, our Board of Directors approved a 2009 quarterly cash dividend rate of $0.68 per share or $2.72 annually.

Our capital activity during the second quarter included the previously announced $133 million ten year secured debt with Freddie Mac atan attractive 6.1% rate.

We also issued 365,000 shares under our DRIP program, generating $12.1 million.

Last, we did issue 400,000 shares under our equity shelf program at an average price of $36.05, generating proceeds of $14.4 million.

Turning to liquidity, as of June 30th, we had $888 million in available cash and line availability, compared to only $459 million of unfunded development and $86 million of secured debt maturities through the middle of 2012.

We expect to add further flexibility over the remainder of the year, through additional asset sales, plus the $300 million of additional secured debt at an attractive rate of approximately 6.5%.

Our credit profile at this time remains very strong.

Our debt to undepreciated book capitalization is 39.7% at quarter end while our interest and fixed charge coverage were 3.5 times and 2.9 times respectively.

Our secured debt stood at 9% of total assets at the end of the quarter and will increase to 14% pro forma for the secured debt transactions forecast in the second half of the year.

We remain comfortable with these levels and note that we have discussed our capital plan in detail with the rating agencies.

Finally, we have updated our normalized FFO and FAD guidance primarily to reflect the increase to our secured debt forecast throughthe rest of the year.

As a result, we now expect to report normalized FFO in the range of $3.11 to $3.18 per diluted share, and normalized FAD in a range of $2.95 to $3.02 per diluted share.

Our expectation for net income available to common stockholders has been increased to $1.81 to $1.88 per diluted share, from $1.70 to $1.80 per diluted share detailed in our press release.

That concludes my prepared remarks and I'll turn the call back to you, George.

Thanks very much, Scott and we're now open for questions.

Thank you, sir.

(Operator Instructions) We will now pause a moment to compile the Q&A roster.

Your first question is from Karin Ford with KeyBanc.

Hi, good morning.

Good morning.

Just first question, George, your comment earlier about seeing the inflection point where you were getting more comfortable to be more active on the investment front.

Can you just talk a little bit more about what you've seen that gives you that view and what we could expect from an investment standpoint volume and categories of assets going forward?

First of all, everybody is just trying to make the best balanced judgment as to when to make investments and what kind.

And we'll be limiting any investments to very high quality, selective portfolios and, frankly, as you know, Karin, there have not been a lot of good -- really good, high quality packages yet in the senior housing area.

We are seeing more opportunities perhaps in the medical facilities arena.

What has made us feel more comfortable?

One, we funded everything through 2012 and that assumes we have to pay off all of our convertible debt which is becoming perhaps less likely as our stock price moves up.

Two, the strength of the capital markets, the improvement in the unsecured note arena that we've seen in the last couple days, stock prices have moved and so I think it is clearly -- there are certainly signs out there that it's time for companies to be looking much harder at investments and when we do, we'll be looking for hopefully acquisitions if we can find them.

But in any event, combination facilities within senior housing and customer-centric acute care facilities, both hospitals and larger, better, nicer MOBs as well.

That's helpful.

Along those lines, we had seen articles that you guys had been selected as the winning bidder on a $1 billion development project in Nassau County in Long Island.

Can you just talk about that project and timing and scope and what your capital commitment will likely be?

I'll turn this over to John Thomas in just a minute but let me say that perhaps we have to coordinate a little bit more closely with some of the health systems.

They were enthusiastic in terms of getting out their release.

We're very enthusiastic about working with them but that charge so far is to be the master developer and if we can provide other services and provide capital later at some point, that would be great as well.

John, do you want to comment?

I would be happy to.

We couldn't be more pleased about the relationship with Nassau.

It's really a reflection of the full spectrum of what Health Care REIT is across the senior housing, acute care, medical office building and ambulatory care environment with our development capabilities, access to capital and really strategic planning expertise that we have.

The engagement is a fee for service engagement at this point, with a prospect over a number of years for significant development opportunities, both in the fee for service delivery on the development side, as well as the investment for acute care and medical office building space.

Nassau's got I think you'll see some exciting things coming out of Nassau in the near term.

They've got great ambitions and we couldn't be more pleased about the relationship.

So whether or not HCN will end up providing capital is still to be determined?

It's still to be determined and frankly that is what the engagement is about.

It's helping them identify the best opportunities for the use of their land and the redevelopment of existing facilities.

So on the fee for service consulting engagement we'll determine what's the best source of capital and whether or not it's an appropriate use of our capital and their appropriate use of our capital.

John, if I could just comment further, briefly.

In the senior housing and care side, we've always been a relationship financier and we have thought we brought a lot of experience to the table for the benefit of our operators.

In the acute care space, medical facility side, one brings a good partnership in perhaps different ways.

And it might be in terms of providing property management services for medical office buildings, but more often than not one leads with development and planning when one forms a relationship with a high end health system.

And we think this is very, very positive news for us that we are there, we're valued as a partner.

We bring a lot to the table and this will be the analogous to our relationship programs in senior housing.

That's helpful.

Just one final question.

Same store revenue growth this quarter was 1.3%.

That was a little lower than you guys are normally in the mid-twos.

Can you talk about why that number was a little lower?

Sure Karin.

It's Scott.

I think you're probably starting to see a little bit of the impact of some of the lack of CPI based increasers in some of the senior housing categories.

And that's probably the biggest factor as to why we always had forecast 1 to 2% same store revenue growth for the full year.

So that's why it's crept down a little bit over the last quarter or two.

That's helpful.

Thanks.

Your next question is from Jerry Doctrow with Stifel Nicolaus.

Thanks.

One, just a clarification, a question from a client.

It looked like the yield on 2Q '09 conversions was dropping.

I think it's just because you've shifted some of the stuff that was coming on in 3Q that was already set as a lower yield.

There's been no change in the return on those properties, it's just a timing issue?

Jerry, it's Scott.

That's correct.

The projected initial yield in our aggregate development pipeline has been consistent at 8.8%.

It's really just a function of the composition of the projects that converted in the quarter.

We had a couple larger ones that were closer to 8% initial yields this quarter but the overall is unchanged.

And remind me, those shift around based on LIBOR something or just a debt cost?

They don't really move based on your equity?

That's right.

They're generally set at certificate of occupancy based on a spread over the comparable Treasury and there's always floors.

Okay.

And I guess what I want to do is come back to the capital.

Obviously, you know, things are dramatically improved from even a quarter ago.

How are you thinking about equity here?

You obviously have a number of different ways to just bleed some out, obviously one of your competitors did an overnight deal last night.

Stock price is back up to close to 52 week highs, I think.

Does that start making more sense in terms of your scheme going forward?

I think I mentioned, Jerry, that we are offering our prices during the last couple years have been averaging about almost 42, 43, and we're up that way.

So it does make one pause.

We're evaluating it now.

We certainly congratulate Jay and HCP on a very successful offering for them.

Clearly it's made all of us sit up and re-evaluate.

Okay.

And then George, you touched on this already but just to reconfirm.

It sounds like you're feeling -- I would categorize the feedback we've gotten so far from the public operators is a bit mixed.

I mean, occupancy was weaker a little bit this quarter, people are talking about it popping up June, July, August, sounding a little more optimistic but it's a mixed bag in terms of how much people have slipped.

It sounds like you're feeling decidedly more confident in terms of where we go on private pay senior housing occupancy.

Jerry, I am more optimistic.

I mean, the signs in housing, the continuous strength within the stock market has really made people look at the world a little differently than they were three, six, nine months ago even.

We think that maybe what will happen is that a number of the existing contacts, existing prospects are coming back to a number of these facilities, so that there is some chance to have some pretty good news over the next, say, six months, when they re-evaluate and come back in.

But in senior housing, especially when you're selling units, entrance fee units, it's a lot of -- there's a lot of blocking and tackling, but I am more bullish than I had been and I must say too that we worked with the operators.

We've helped them look at their marketing and sales programs and I think that they are really good right now and with the opportunities we expect to see more volume over the next six to nine months.

Now, when that will occur and how consistent that will be, that's anybody's guess.

And thanks.

Just last question from me.

In terms of prospects for new investments, are you starting to see anything more in terms of packages coming to market, either distress driven or consolidation driven, particularly in senior housing?

We are not seeing a lot.

We are perhaps seeing a slight uptick in the number of packages we've seen but it's been a surprise to all of us in this space as to how few have really come to market.

We are seeing a few more at the moment.

Thanks a lot.

Your next question is from Rich Anderson with BMO Capital Markets.

Hey, thanks and good morning everyone.

Hi, Rich.

George and team, you're talking about opportunities and the inflection point, all that good stuff and yet at the same time you're talking about how despite the Nassau news, you talked about how your development exposure will decline.

Obviously, you're getting the same message maybe from investors that we do, which is love the name, blah, blah, blah, but what about their development exposure in this market?

So in light of that, will development be a part of this sort of inflection point movement or is it going to be mainly acquisitions?

Well, we would certainly rather buy the new state-of-the-art facilities that gives us immediate earnings, the question will be whether or not they are really available.

And in terms of maybe a longer term view, Rich, we have always through our 38, 39 years thought that development was a part of our investment program.

And again, I take you back to the '70s when skilled nursing were the new modern plans coming off of the three story manor facilities, from independent living with [Tott, Hill and Coalson] and the rest and the '90s when we were the leader in assisted living.

So would we rather buy?

Yes.

Are we going to find acquisitions?

Some.

Are we going to prioritize for acquisition?

Yes.

But are we going to completely move away from development if we can do those with top end health systems or top end senior housing?

We're not going to say no to those.

We're going to keep it very balanced.

The reality, again, as you know, Rich, is that our development percentage popped up a bit because when one is a third or a half of the way through development, you don't stop.

You get them done.

You get them open.

And you do pretty well.

And as I said, we match funded during that period.

The projects that you do not close on are those that were potential acquisitions.

So I think you'll see us being more moderate in terms of our percentage of development.

And I think over time, as you see some of these high end assets open, I think our portfolio will be viewed as one of the premier real estate platforms in the space.

Right now, zero acquisitions in your official guidance.

Would you suspect that any new acquisition activity would be immediately accretive?

I would think that any acquisitions would be accretive at this point.

Okay.

And also, does this inflection point give rise to some consideration to utilizing the flexibility of RIDEA?

Oh, yeah, sure, we've been very clear that we don't view RIDEA structures as binding a panacea.

They can be used in some really unique situations where perhaps there are turnarounds or new assets that have been undermanaged, so that one can align interests of the management company and Health Care REIT appropriately, so we're both running in the same direction.

We would have many more incentives and disincentives for the management team in place if we did a RIDEA deal and many times it just depends on the particular opportunity and the particular operator as to whether or not we do RIDEA.

Okay.

Just I think last question, just looking at the coverage for your CCRC portfolio, independent living/CCRC, after management is 1.08 times, a year ago it was 1.23 times.

Obviously, trending down, no surprise there, but are you concerned at all that you get to a level below parody there?

Hey, Rich, it's Scott.

The answer to that would be no.

I think you've seen some indications of stabilization over the last quarter or two, as you look at the sequential results, were within a basis point or so of the prior quarter.

I would also say that is trailing 12 months as of March.

I know that one of our largest independent living operators saw some reasonable occupancy improvements in May.

At least a percent.

So at least latest data is encouraging and again, they're focusing on profitability through rate increases and expense control and I would again point out, it's encouraging to see that margins increased over the last quarter, which ultimately as occupancy hopefully comes back, you set pricing appropriately in your facilities, that will just further enhance coverages.

Okay.

Great.

Thank you.

(Operator Instructions) Your next question is from Herb Khaner with Morgan Keegan.

Just a couple quick questions.

Scott, you mentioned that you expect MOB NOI to run about $84 million to $85 million for the year.

Can we then take that to mean that Q2 probably marks the low end and we'll see slight improvements in the next two quarters?

That would be correct if that's the way the numbers fall out, yes, $84 million to $85 million is the annualized core MOB guidance.

So we did $21.4 million in the first quarter and $20.7 million in the second.

And a follow-up on an earlier question regarding the same store revenue growth.

In the specialty care segment, it was down about 2.6%.

Was there anything to that, other than lack of CPI based increases that accounted for that decline?

Yes, actually, in specialty care there was a minor factor.

There are 17 assets in that bucket and there was one single asset where we gave one hospital a minor rent and interest accommodation of about $250,000 a quarter.

So that single change resulted in the entire specialty care decline.

If you took that one single asset out, specialty care would have been actually up 1% and the overall would have been up 1.6% instead of 1.3%.

And will that accommodation be effective the next several quarters as well?

Yes, it's going forward and we're actually still earning about 10% on that asset.

It's just a reduction versus last year.

Okay.

That answered by question.

Thanks a lot.

Your next question is from Jim Sullivan with Green Street Advisors.

Good morning.

Hey, Jim.

Hey, Jim.

On the development assets, you talked about properties that had been in fill-up that are converting to stabilized in 2Q and 3Q.

Sounds like you're getting your triple net rent as expected but I'm curious, if you look at your rent and look to the cash flow at the property level, how those assets are doing relative to the original underwriting, obviously they filled up during a very challenging time.

I'm just curious how the performance stacks up to your original underwriting.

Well we have metrics that look at how construction goes and then we have a fill-up schedule that we evaluate every month as well and to date, we're pretty much right on target.

Despite the headwinds, particularly in the senior housing?

Yeah, well, we've had some really striking examples that are just the opposite of what one might expect.

A couple of our operators, one operator opened with essentially the building filled and we've had a number of buildings, and this is assisted living and dementia, without the IL component, but we've had a number of them fill in six to eight months.

Some of them have even been filling ahead of schedule but usually that's a result of a seasoned operator who has done a great job pre-marketing and knows a particular space.

We've really seen some really good examples of just good, tough operators who know how to do the blocking and tackling and fill up their buildings.

Switching to your loans receivable.

Last quarter 15% of the portfolio was on non-accrual.

Has there been any meaningful change in a positive or negative way with respect to the non-accruals.

That number is essentially unchanged it's $72.5 million from $72.7 million in the prior quarter so it was down about $200,000 due to minor principal payments we had in the second quarter and the composition of those loans is unchanged.

And during 2Q it looked like you advanced about $30 million to operators.

I'm curious, when you make loans to operators, are they typically using the money to enhance the physical asset or are there circumstances where those loans are being advanced to support the operating business of that operator in a tough time?

Our loan packages have been for any number of reasons.

I mean, one that we've talked about earlier had been when Emeritus repurchased some of our facilities, giving us a large gain and we took back financing as did NHP and I think HCP, doing very similar things.

Others related to a very substantial company on the East Coast that helped more with the corporate infrastructure as well as particular improvements to facilities.

So they're all over the board, Jim.

The loan George was referencing this quarter, it was a little north of $20 million of the $31 million total.

Outside of that one larger loan to that East Coast operator George mentioned, the amounts were fairly small and I would characterize them as routine this quarter.

Just on the issue of loans, our loans are probably a little higher than they have been at certain times but I think 55% to 60% of them relate to three very substantial operators and they were to accommodate a sale, as I mentioned earlier, in the Emeritus case and to two other substantial operators who are very important to us within our portfolio and we find them to be very secure.

You're really talking about 40% of that number and I don't have it in front of me being the standard loans that, again, address an array of different situations.

Different topic.

Scott, you touched on CPI escalators before.

Can you shed a little more light on how those work, when do they kick in?

What CPI period is measured in determining what those rent increases will be?

Sure.

The senior housing and specialty care increasers are about 70% of the increasers in that portfolio are based on CPI.

And in the medical office portfolio, it's a much lesser component, it's only about 8% of the medical office building increasers.

The way it works, basically I believe the official index is the urban wage and clerical workers index in some cases but essentially upon the first anniversary of a lease, whatever the rate of CPI growth is in the preceding month is the basis for the increaser on the lease with generally, say, a maximum of 25 or 30 basis points from the prior year's rate.

So they can never go down.

If CPI were negative like it's been since December of 2008, you would basically be in a situation where you keep rent the same and then we actually have the ability to catch up in future periods for to the extent that CPI increases at a greater rate.

So we think the impact this year as they blend through this year ultimately results in again, as I said, 1% to 2% same store NOI growth in our senior housing and specialty care portfolios.

And we looked at the number even just as recently as this week and we're optimistic but we will see obviously, we could be in a position where toward the end of the year where the CPI indexes we may actually start to see some increasers again.

Okay.

That's helpful.

Then my last question, there's a lot of moving pieces on the revenue side with respect to your medical office building portfolio.

But my specific question is what are you seeing in terms of market rents and market rent trends within the medical office building portfolio?

Are you still getting -- are you still seeing market rent increases or have those really flattened out at this point?

This is John.

On new leases and renewals it's been a compressed market this year.

We're having better than expected and strong renewal leasing and the terms of both our new leases and our renewal leases are longer than historical norms but there has been some rent compression this year.

We see that improving the second half of the year and going forward.

On our own portfolio, we had -- we've had a couple of master leases from hospitals that rolled off.

They were long-term with CPI increases that are not being replaced at the same rate.

But in those couple of instances, which is a very small amount of square footage, in particular, an example would be -- we talked about this before in Los Gatos, where El Camino Hospital District has taken over for tenant there and there's a substantially renewed interest in that hospital from the community and the physicians and we've seen a real uptick in the leasing activity for the facility-- the MOB that we own there which is really the prime MOB on that campus.

El Camino has reopened that hospital and we are actually managing a couple of the other MOBs on the campus and leasing activity is very strong and expect to get rent improvements over the near term.

Thank you.

Thank you.

Thanks, Jim.

There are no further questions.

I'll turn the call back to Mr.

Chapman.

Yes, I would like to thank everybody for their participation and to remind them that Scott will be available for any follow-up questions after this call.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.