Welltower Inc (WELL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Health Care REIT first quarter 2010 earnings conference call.

My name is Tina, and I will be your 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 a 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, Tina.

Good morning everyone, and thank you for joining us for Health Care REIT's first quarter 2010 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 attained.

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

I'd now 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.

Thank you, Jim.

This morning I'll discuss our current portfolio and its performance, our success in positioning the portfolio to meet the needs of our customers going forward, as well as the progress with our entrance fee communities.

I'll then focus on the growth platform that we have built.

Our portfolio is strong and diverse, with coverages of about two to one, and our top five and ten operators comprise only 25% and 37% of our portfolio, respectively.

More importantly, medical facilities -- that is hospitals, medical office buildings, and life science buildings -- have become a very significant part of the portfolio, currently comprising 40% thereof.

We are establishing important relationships with health systems, resulting in investments in modern customer-centric hospitals and medical office buildings, and our life sciences investments have added another property type that enhances our diversification, as well as our offerings to health systems.

Clearly, these investments provide meaningful portfolio diversification, as well as investment opportunity.

When we acquired the Woodrose and Medina MOBs several years ago, we also acquired property management capabilities, and we made it clear that that time that we would produce a very strong MOB portfolio and property management team; and we're very pleased with our progress in doing so, as we have culled through the MOB portfolio, eliminating smaller, unaffiliated MOBs, while at the same time investing in larger customer-friendly MOBs affiliated with excellent health systems.

With our recent Aurora acquisition, our MOB now stands at 93%.

The percentage of on campus and affiliated MOBs is up to 80%, and heading toward our near-term goal of 90%.

The average size of our MOB portfolio has increased from 39,000 square feet in 2006 to 52,000 square feet today, and is continuing to increase.

Generally, we believe that MOBs will be even more critical elements in the health care sector, as health systems extend their reach and branding efforts through these facilities, and also provide more health services such as outpatient surgery and testing.

At the same time, the facilities are better designed and focused on the customer.

We believe that MOBs are generally favored by this health care reform that John will discuss later, and have benefited from the dramatic shift to outpatient services.

I might point out before leaving this topic as well that Mike Noto's property management team has added key personnel, and is hitting on all cylinders, so we thank all of them for their efforts.

In the senior housing sector, we are successfully moving our facility mix from free-standing facilities to facilities that offer multiple services, and place more emphasis on wellness.

Our free-standing SNFs, skilled nursing facilities, now comprise only 15.5% of the portfolio, and could be as low as 12% to 13% by year end.

Generally, we believe we have a portfolio that is comprised of best-in-class assets that give us great confidence in future performance.

Know that we will continue to position our portfolio to minimize the possibility of functional obsolescence, and maximize performance and quality care.

Let me say a few words about independent living facilities, and CCRCs.

It is clear, at least in our portfolio, and I think well-supported nationally, that occupancies in our independent living facilities are bottoming out.

And while CCRC, fill up and sales are more complex, we are certainly seeing better volumes in fill ups as well.

And with minimal development activity, we believe the favorable demand/supply relationship should produce significant value in this space over the next several years.

Scott Estes will share some additional information regarding our CCRC progress later in his remarks, but I would say that we're very pleased with our progress.

As an example, our largest CCRC operator, Senior Living Communities, has entrance fee and rental occupancies of 55% and 82% respectively, inclusive of the newest CCRC that opened a month or so ago.

This operator has been successful even in these tough markets, because it pays close attention to every aspect of its business, including running a terrific wellness program and a noted dementia program.

I should note that within this CCRC space, there has been a change in our operator base, relating to the acquisition of Banyan Senior Living's Greenville, South Carolina facility by Senior Living Communities, and this was a beneficial transaction for all of us, as it allowed our largest operator to expand in its region, and for Banyan, it permitted its Founder and Principal to begin his retirement process, but continue to provide ongoing support and consulting for a period of time.

We did incur an expense of $5 million that includes a balance of the development fees owed to Banyan by us, and a lease termination fee paid for the value created by Banyan, as well as to facilitate the transaction.

Let me turn to our growth platform.

In 2008 and 2009, when the economy was in some difficulty and when the capital markets were troublesome, we enhanced our capabilities through key hires and repositioned our structure and team for our competitive advantage.

In 2009, we raised approximately $700 million of equity and $260 million of secured debt, and as we entered 2010 we further improved our liquidity, and we lengthened our debt maturity through successful offerings of convertible debt and unsecured notices.

We are quite pleased with our investment results year to date of $700 million, and as a result of this great start, and our optimism regarding our ability to close additional attractive investments, we have increased the high end of our acquisition guidance by $200 million.

We believe that our full spectrum investment platform, property management development capabilities, and relationship approach to investing provide tremendous competitive advantages for Health Care REIT.

The ability to pursue and capture investments across a full spectrum does contribute to portfolio diversification, a 40-year focus for us; but the other clear benefit is the expanded investment opportunity.

By being capable of investing responsibly in each segment in each sector, we can select the best risk/reward opportunities as markets change.

So we remain enthusiastic about our ability to capture excellent new investments, driving strong earnings growth going forward.

Now at this time, I will turn to John Thomas, Head of our Medical Facilities Group, to comment on health care reform and give you an update on our life sciences investments, and in turn, John will introduce Scott Estes, our CFO, for our financial and portfolio review.

John?

Thank you, George.

Before I begin, we would like to recognize the dedicated members of the Health Care REIT team located in our Nashville office.

As many of you know, the region has been devastated over the weekend by flooding.

While our office and MOBs in the area are all fine, and we've also been able to account for all of our associates, and they are fine, our thoughts and prayers go out to them and the people of Nashville as they work through their painful losses and recovery.

Turning to health care reform, the health care reform law is an historic event.

We've been following the legislative discussions closely for over a year through access to information from a number of Washington insiders, including members of congress on both sides of the aisle, K Street consultants, and a close friend of Health Care REIT, former Secretary of Health and Human Services, Tommy Thompson.

We believe the new laws will have a favorable impact on our portfolio and opportunities for growth, but we all agree it will be years before we know if the law is a success, and exactly who will benefit the most.

Perhaps the best thing about the legislation for now is certainty, and a move from debate toward implementation.

I'd like to take a few minutes to discuss specific implications on our portfolio.

For medical office buildings and hospitals, we anticipate a continued evolution of medical office space away from office buildings toward larger ambulatory care centers.

It is not clear that there will necessarily be a demand for more total office space.

While Congress and the Administration estimate 30 million more insured over the next five to ten years, the number of physicians is not changing.

With the current and growing shortage of physicians, hospitals will continue to recruit available physicians aggressively, while striving to lower the cost of care across the care continuum, and thus more and more physicians will either be employed by hospitals or large groups that will contract with hospital systems.

This should benefit Health Care REIT, and reinforce our business strategy of aligning with larger academic medical centers, and other hospital systems aggressively recruiting physicians.

The law's reimbursement changes emphasizing pay for performance and bundling demonstrations will strive to eliminate today's silos of care, thus forcing greater continuity of care between providers and increased transparency.

We believe this will lead to more comprehensive and more efficient outpatient and inpatient facilities, aligned with other specialized facilities, for the necessary patient care.

General acute care hospitals will work even harder to transition patients out of the general acute setting as quickly as possible, and this will benefit our post acute facilities, particularly inpatient rehab facilities and long-term acute care hospitals.

Over time, as site neutrality for payment becomes more prevalent, we believe skilled nursing facilities will also become an even more integral part of the hospital post-acute care setting.

In the near term, the law directly benefits the large LTAC operators by continuing the extension of the LTAC moratorium, preventing new LTAC development until after December 31, 2011.

ALTHA, the LTAC industry trade group, believes this may be the last extension.

These trends will have a significant impact on hospital alignment strategies with physicians, in-patient rehab, long-term acute care, and skilled nursing facilities in or near the hospital's campus.

The hospital will control the bundle payment, and have responsibility for both the financial and clinical results of care, all of which is driving health care real estate development, led by forward-thinking health systems.

For skilled nursing, the market basket will undergo productivity adjustments beginning in fiscal year 2012 and running through 2019.

While negative, we anticipate these adjustments to have a minimal impact on our lease coverage, as our skilled nursing portfolio has a strong coverage before management fees of 2.4 to 1 times.

In a positive development, the [route] for payment system implementation has been delayed until fiscal 2012.

For life sciences, the law will benefit near and long-term life science investments.

The industry agreed to $80 billion in cuts over ten years in reimbursement, but the cuts correspond with a reduction in the doughnut hole in Medicare Part D, an affirmation that Part D is an affective and popular benefit, and creates long-term certainty for the pharma industry.

While 30 million more insured may not lead to the demand for more immediate medical office space, Medicaid and new insurance products for the uninsured will provide prescription benefits, and thus large volumes of cells.

Biologics also received a new intellectual 12-year property protection, which eliminates a long-running concern over these important products, and thus promotes new science development and investment.

Health care reform did not open up the market for reimportation of lower-priced drugs.

All of these factors combined should drive more long-term R&D investment, despite the cuts and new taxes on the industry, and we believe continued growth of our life sciences facilities.

We continue to see opportunities to provide life sciences research, and clinical trial and education facilities to our academic medical center partners.

More and more hospitals are seeking out pharma to align with our researchers and physicians on our campuses, and we will have an excellent opportunity to acquire and develop these facilities through our numerous and growing number of health system relationships.

In summary, health care reform has significant implications for our country and the Health Care REIT portfolio, as we believe there will be continued demand and more opportunities for new types of health care facilities.

You can't assess the impact of the law without also evaluating the Medicaid expansion and the ability of State budgets to fund their portion of these programs.

We will be watching those State budgets, and otherwise keep well informed, and evolve our portfolio accordingly.

We are also monitoring the energy policy legislative discussions.

Hospitals typically are the largest users of the utilities in a community, and we will continue to assess the impact of energy legislation on our senior housing and hospital partners.

We are already investing in people and solutions to help us deliver value-added energy management and cost reduction strategies for our buildings and clients.

We are charter members of the US Department of Energy's Hospital Energy Alliance, and have five projects under development that will qualify for at least LEED Silver status, consistent with our policy of building healthy sustainable buildings.

We will report on these legislative efforts, and our proactive efforts to lower the energy costs of occupancy for our tenant partners, on future calls.

For life sciences -- now I'd like to give a brief update on our life science joint venture with Forest City.

The joint venture has moved forward in a very productive manner.

We've been working to integrate accounting and property management systems, while also looking for additional facilities to pursue with our Forest City partners.

We recently had our first joint venture governance meeting, and have had a very productive review of all assets included in our joint venture, as well as moving forward with plans to add the seventh University Park building by mid-May, which would create an additional health care REIT investment of $28.3 million.

We continue to look to expand our life science investments in a measured and conservative manner, but have nothing more to report at this time.

I'll now turn the call over to our Chief Financial Officer, Scott Estes, and we'll be happy to answer any questions you may have later.

Thank you.

Thanks, John.

Good morning, everyone.

As George mentioned, we've been one of the most active REITs in our sector in terms of new investments.

Our current portfolio performance has been steady through the economic downturn, while our liquidity, credit metrics and debt maturity schedule remain strong, and put us in position to continue to grow the portfolio.

Turning to the details of the quarter, we completed $585 million of gross investments, which included the acquisition of medical office buildings leased to Aurora Health Care, and our life sciences joint venture with Forest City Enterprises.

We had $33 million of dispositions and loan payoffs, resulting in net new investments of $552 million.

We also started two excellent development projects during the quarter.

The first is a 153,000 square foot, 72% pre-leased, on-campus medical office building in Murrieta, California, providing such services as radiation oncology, cardiology, and neurosurgery.

This will be the only MOB on the campus of the HBN-owned hospital sponsored by Loma Linda University Medical Center.

Our second project is a 52,000 square foot, 100% pre-leased medical office building that is a cancer center on the campus of Tallahassee Memorial Hospital in Tallahassee, Florida.

Including these new projects, we have only $193 million of unfunded development commitments, and also we successfully delivered another $164 million of development during the first quarter.

I'll now touch on the acquisitions which have closed, or are expected to close subsequent to quarter end.

In April, we completed two acquisitions with Capital Senior Living, totaling $85 million.

This includes the previously-announced $49 million portfolio consisting of five assisted living facilities in Nebraska and Iowa, and a new $36 million portfolio consisting of three assisted living and dementia care facilities in Indiana.

These assets are leased under a 15-year initial term, at a starting rental yield of 8.25%.

And lastly, as John mentioned, we do expect to close the seventh and final building in our life science JV with Forest City in May.

Our expected investment of $28.3 million represents our 49% interest in this $58 million property, and the joint venture will assume a little less than $30 million of secured debt on the property, with a rate of 6.4%.

Before turning to portfolio results, I would take a moment to mention some of the changes we made to our supplement and disclosure this quarter.

First, our income statement now includes a line in continuing operations labelled "income from unconsolidated joint ventures"; this represents our share of the University Park life science joint venture net income.

Second, in the investment and portfolio sections of the supplement, we report both independent living and assisted living properties under a combined senior housing category.

We've also added some disclosure on our entrance fee communities that you can see on page 23 of the supplement.

And last, we have included additional disclosure regarding our life science investment on page 30 of the supplement.

Turning now to the portfolio, as I mentioned we did complete $164 million of development projects during the quarter, which included one entrance fee property, one medical office building, one dementia care facility and four rental senior housing properties.

Regarding lease up, we did see continued progress moving assets out of our unstable bucket, with seven properties moving to our stable portfolio this quarter.

I'd note that three of the first quarter stabilizations were entrance fee communities, which each had an aggregate occupancy in excess of 85%.

For our senior housing and care portfolio, performance remains steady, and occupancy continued to improve versus the prior quarter.

Our stable senior housing payment coverage, comprised of the former IL and AL categories, has been in a very tight range, around 1.5 times over the last eight quarters, while our stable senior housing occupancy for the quarter increased 20 basis points sequentially to 89.4%.

Skilled nursing has also performed well, with stable payment coverage there consistently in a range right around 2.3 times over the last eight quarters, and skilled nursing stable occupancy also improved by 40 basis points sequentially this quarter to 84.2%.

Now I would like to provide an update on our entrance fee communities.

We currently have 14 properties, with an investment balance of $759 million at the end of March, representing 11% of the portfolio.

During the quarter, we completed the construction of one entrance fee property with an investment balance of $55 million, on which we are currently recognizing a yield of 6%.

The current rental yield for our 13 open communities remains at a blended 6%, and I would point out that there were no adjustments made this quarter.

We did expand our disclosure, as I mentioned on page 23 of the supplement, and there you can see that the aggregate entrance fee occupancy for our open facilities at the end of March was 46%, while rental occupancy within these communities stayed at 79%.

We are pleased with the progress of our open communities as they continue to meet move-in budgets.

Year to date through April 23rd, we have had 66 entrance fee move-ins versus our budget of 64.

In effort to give some additional perspective regarding historical occupancy trends here, if you look at the 12 entrance fee properties which have been open since August of 2009, total occupancy within these communities has increased from 50% to 62% through April of 2010.

This was comprised of an increase in the entrance fee unit occupancy from 39% to 50% over this period, and an increase in rental unit occupancy from 66% to 80% over this period.

And most importantly, I think, as a result of these improvements we were able to move three of our entrance fee properties to our stable portfolio this quarter.

Now moving over to medical facilities, our hospitals continue to report stable performance, with an 8-basis point improvement in year-over-year payment coverage to 2.3 times before management fees.

Our medical office portfolio also had a solid quarter, with an increase in occupancy to 93%, and a strong quarterly retention rate of 93% as well.

Our overall NOI for the first quarter was $27 million, which is up 13% sequentially due to REITs and acquisitions and development completions.

Same store NOI for the quarter was $19.9 million, which was down 5% year-over-year.

I would say this result was in line with our internal budget, and we do continue to forecast same store NOI of approximately negative 1% for the full year.

The first quarter really should be our weakest quarterly result, as we expect same store NOI in a range of plus or minus 1% for each of the remaining three quarters of 2010.

Last, during the first quarter we did spend $3.8 million in CapEx in our MOB portfolio, and continue to anticipate $17 million for the full year.

Our life science assets were in our portfolio for 38 days in the first quarter, as we closed the first six buildings in our joint venture with Forest City on February 22.

Results are in line with underwritten expectations, and we're pleased with the communication and information flow between our life science team, Forest City's executive management, and their asset management group on the ground in Cambridge.

Looking now at our same store revenue growth in our senior housing, skilled nursing and hospital portfolios, as presented on page 23 of the supplement, it was a decline of 1.5% in the quarter.

This was again a result of the yield reduction at several entrance fee communities on a year-over-year basis, along with two minor reductions in our skilled nursing portfolio, due to some restructurings which occurred in the second half or 2009.

Excluding the impact of these operators, same store senior housing revenue increased 2.4%, skilled nursing revenue increased 1.6%, and overall same store revenue increased 1.9% for the quarter.

We've actually seen some higher than budgeted increasers thus far in 2010, generally driven by CPI increases, which have been in the 3% range for each of the first three months of the year.

We do remain comfortable with our full year forecast for positive 2% same store NOI growth in our senior housing and care and hospital portfolios, excluding the impact of the reductions previously discussed.

Turning now to financial results, we reported normalized FFO per share of $0.75, and normalized FAD per share of $0.70 for the quarter.

Earnings results declined versus last year as anticipated, due to the impact of the significant balance sheet deleveraging completed during 2009.

Now I would like to provide a few details on some of the normalizing and unusual items this quarter.

The first is we did record a net gain of $6.7 million on first quarter dispositions, which included two skilled nursing facilities and two medical office buildings, and these sales generated gross proceeds of nearly $40 million for the quarter.

Next, as previously disclosed, we repurchased $302 million of our existing convertible senior notes in the quarter, which resulted in an $18 million debt extinguishment charge.

Also during the quarter we recorded transaction costs of $7.7 million, consisting of the $5 million lease termination fee that George discussed earlier, and $2.7 million of acquisition costs associated with first quarter investment activities that are now required to be expensed as incurred.

The majority of these acquisition costs relate to debt prepayment fees in connection with our Aurora MOB portfolio acquisition.

Our G&A expense was $16.8 million for the first quarter, slightly below the $17 million to $18 million first quarter guidance we provided on our last call.

This includes $3.7 million of accelerated expensing of stock and options for certain employees and directors, which normally occurs in the first quarter every year, and a $2.9 million vesting of a performance-based stock award.

For the remaining three quarters of the year, we continue to expect a G&A run rate of approximately $11 million to $12 million.

As we discussed on the last call, the $2.9 million performance-based stock award would be excluded from our normalized results.

This payment represents a performance-based grant paid to George Chapman for meeting performance-based criteria over the years 2007 to 2009.

This was a payment that was made at the discretion of the Board in January of this year, and thus was expensed when paid, and we believe not an appropriate part of our normalized quarterly results.

And regarding our dividends, we recently declared the 156th consecutive quarterly cash dividend for the quarter ended March 31st of $0.68 per share, which represents a rate of $2.72 annually.

As I mentioned last quarter, the Board approved a 2010 quarterly cash dividend rate of $0.68 per share beginning with this quarter.

In terms of capital activity, I think our capital activity has been very positive, as we successfully issued $342 million of 3% convertible notes during the quarter, which allowed us to repurchase a portion of our existing 4.75% convertible notes.

By completing this transaction, we extended approximately $300 million of near-term debt maturities through at least 2014, and reduced current cash interest expense.

We also raised $300 million of unsecured senior notes that closed in April at an attractive 6.2% yield.

As this transaction did close subsequent to quarter end, on a pro forma basis our March 31 line of credit balance was reduced to $130 million.

In terms of equity, this quarter we received $16 million from our DRIP program through the issuance of 386,000 shares at an average gross price of $42.50, and we issued no shares under our equity shelf program this quarter.

I think our credit profile also remains strong.

Currently, our debt to undepreciated book capitalization ratio is 39%.

Our interest and fixed charge coverage stands at 3.7 times and 3.0 times respectively, and net debt to trailing 12-month EBITDA is 5.4 times.

Secured debt remains low, at only 10.7% of total assets at the end of March.

Last, I will just review our 2010 guidance and assumptions.

We are increasing the high end of our acquisition guidance, as George mentioned, by $200 million this quarter, as we continue to see attractive investment opportunities.

This increase brings our gross investment guidance to a range of $1.0 billion to $1.4 billion for the full year.

This includes $700 million to $1 billion of acquisition and joint venture investments, and $300 million to $400 million of funded development.

We continue to forecast $450 million of development conversions and $300 million of dispositions, which will primarily consist of freestanding skilled nursing assets.

In addition, we expect that our previously-announced secured debt transaction with HUD should close late in the second quarter, generating $80 million of proceeds at an attractive rate of approximately 5%.

As a result of our unsecured debt issuance in April, we have lowered the high end of our normalized FFO and FAD guidance by $0.05.

We now expect to report normalized FFO in a range of $3.10 to $3.20 per diluted share, and normalized FAD in a range of $2.87 to $2.97 per diluted share.

Our expectation for net income available to common stockholders has been updated to a range of $1.36 to $1.46 per diluted share, as detailed in our press release.

That concludes my prepared remarks.

And I think, Operator, we'd now like to open the call up for questions, please.

(Operator Instructions)

Our first question comes from the line of Craig Smith with Banc of America, Merrill Lynch.

Thank you, good morning.

Your outlook for acquisitions, the total market for the remainder of 2010, I see that you've raised your upper end, but is the four months that we've seen a good indication of activity for the rest of the year, or do you actually expect the entire market to pick up in activity?

That's a difficult question to answer.

We had a very good first quarter, and I don't think that can be indicative of our year at least.

Our benefit really comes from our full spectrum investing, and John and his team are finding a lot of great health system related investments, MOBs, and Chuck Herman's side, we really cover the country and are finding our share of investments, although, you know, cap rates are pretty low, frankly.

There hasn't been much of an adjustment.

So we have to work to find the right risk-adjusted investment.

So I mean I think people are working hard in our REIT and other REITs, and other specialty lenders, and there's a lot of competition, but I think we're going to get more than our share.

I wouldn't want to say anything more.

And your acquisition directors, do they focus on a certain type of health care asset or do they work the entire breadth of the area?

Chuck is responsible for senior housing, which encompasses independent living all the way through skilled nursing.

And more often than not, his team can end up finding investments that can be turned over to John's team and vice versa.

It really is very much opportunistic.

On the other hand, I would not at all be surprised to see us gravitate toward nearly a 50/50 split over time between the medical facilities area on one hand, and the senior housing on the other.

But it is very much opportunistic.

We're looking for good -- very good buildings that are future-oriented, take into account the customer preferences that are being asserted even more strongly as each year ensues.

And we're looking for best operators and the best health systems, because we've really found that by finding the good -- great health systems that want to bring the best care, and by looking to operators who have a history of delivering cost-effective, efficient services, that we do well.

One of the things we've found is that with 60 or more operators that are part of our sort of ongoing relationship groups in the senior housing, that we have recurring business that some people may or may not have.

With good relationships with health systems, we think we will get recurring business.

But it is really hard to say exactly what ratio they will come in during the remainder of the year or a two-year period.

But I think we'll move to about a 50/50 split over time.

Thank you, that's helpful.

Our next question will come from the line of Jay Haberman with Goldman Sachs.

Good morning, everyone.

Just want to focus on the joint venture relationship or partnership you have now with Forest City, on the life sciences side.

Can you speak to opportunities?

You mentioned looking for some acquisitions; I'm just wondering can you talk about your conversations with Forest City, and perhaps what you're seeing at this point in the market?

Because it is a fairly competitive landscape at this point, I'd say, in that segment.

Jay, this is John Thomas.

I think that's a fair assessment of the market.

We are seeing some -- the way our relationship works with Forest City is very collaborative, but we're not obligated to take them opportunities we find and vice versa, but that is in fact how we're operating in the partnership.

Really across the country in some of the major life science markets and communities, we're seeing some uptick in activity with kind of corporate campuses, and again, some hospital-related development opportunities.

So getting the -- we're seeing more activity and competitive things and again, some of the things we're looking at are, I would say, somewhat off-market, and being brought to us through our relationships.

Okay.

And I just want to switch back to senior housing for a moment, and the CCRCs.

They clearly have been impacted by the downturn thus far.

I know you've talked in the past about reducing your exposure, but I'm just wondering if you think this might be an opportunity in the next two or three years, as you start to see the housing market recover?

In my opening comments, I think I've confirmed your view that we believe that independent living, and maybe to a lesser extend CCRCs, will benefit from the uptick in the economy and the improving housing market, and maybe more importantly the demand/supply relationship.

So, we are bullish.

On the other hand, we have to see performance in our CCRC ranks, and there is always that possibility that we will find an opportunity for one of our good operators, or have an opportunity with another operator that we like to do something akin to a CCRC type of investment.

Assuming we get those at the right price and with the right operator and the right market, I can't say we wouldn't do that.

But right now we're looking for performance, and we'll make those assessments as opportunities occur.

You know, just a year or so ago, we purchased a distressed CCRC for Donald Thompson Senior Living Communities at what we thought was $0.50 on the dollar, and the fill up and the sales have been slow, just as anticipated, but we think it was a very good value.

So we never say never.

Okay.

And then lastly, you didn't change the disposition guidance.

Should we take -- this is not a good time to sell?

Or why not take advantage of the capital on the sidelines and continue to reposition the portfolio, your underperforming assets?

Right now, our disposition guidance remains the same.

Many of the folks that buy us out go to the agencies.

The agency refinancings tend to move along very slowly.

There are other ways to do those refinancings through specialty lenders, and to some degree bonds, and all of those take some time, and we'll all see by year end whether they all get done.

Thank you.

Our next question will come from the line of Rich Anderson with BMO Capital Markets.

Good morning, everyone.

Good morning, Rich.

I just want to make sure -- this may be semantics, George, but you said you're -- combing the market, 50% of your interest could potentially be in the MOB area.

But the comment was made that maybe the office business would not see an infiltration of interest from reform, and it would be more on the ambulatory side.

Are you just using MOB as more the broader term, including ambulatory care, or how do you --

No, more and more, Rich, it's hard to tell the difference between the two.

In most of our -- we probably prefer to have ASCs, or ambulatory surgery centers, in most of our medical office buildings.

And today, you can't even see the differences between the old 30,000 and 40,000 square foot MOBs without ASCs in them, and today's so-called MOBs that could be 150,000 or 250,000 square feet with an ASC with wellness with a full spectrum of testing, it's just night and day.

John, do you want to add anything?

I would just add that I think we're using it somewhat generically to include really a 50/50 split between senior housing and the acute medical, acute medical including hospitals and life sciences as well.

So again, as George said before, it's really opportunistic in where we see the best and brightest opportunities, and we're seeing opportunities across that spectrum.

And most of our developments are exactly as George described, larger on-campus ambulatory care centers, and they are very integral to both, and the in-patient facilities that they are next to.

Understood.

Just wanted to clarify that.

You mentioned also investment enthusiasm is a big theme in this call today, and how reform, again getting back to that, could play a positive role.

But it seems to me that's a very long-term factor, and maybe the shorter-term factor from an investment standpoint for you might be hospitals getting squeezed from Medicaid getting pulled back on them and hence, having to seek out third parties.

Do you think that's the right way to think about it in terms of how you get involved in the near term?

Is it more of a Medicaid squeezing phenomenon or is it really reform this year that will drive investment?

This is John again.

Across our portfolio, you know our government payer as part of a percentage of our payer mix is relatively low, and Medicaid is even -- very a small portion of that.

So again, in the near term, it's -- the opportunity is again the health system is building larger buildings to capture the physician supply that is out there, and the higher-quality physicians, and again that's part of our life science [thesis] as well, because those positions are looking for not only clinical opportunities but research and clinical development opportunities as well.

That really is the near term.

But again, the squeeze on Medicaid will have some impact on the lower-end skilled nursing, but longer term we see the uptick being the hospital systems trying to attract the highest and best demographic patients.

Absolutely, Rich.

Let me add something to John.

We see the evolution, the change in health care as being the market driving different types of buildings, real estate platforms.

Outpatient surgeries today, when you get systems that are doing, 60% to 65% in some systems, outpatient procedures as opposed to inpatient, with customers demanding different and better care and a better environment, frankly the hospitals and the health systems have to build or substantially renovate to have better space to perform, and that's where we've positioned ourselves.

One, it helps a little bit that some of the foundations' funds are down a bit because of the market.

It helps, I guess, that bonds have been somewhat less predictable the last two or three years for the systems.

But maybe more important in the long run is our ability to go to systems and provide solutions, and that can be development; it can be consultative; it can be managing the MOB to separate the hospital from any possible fraud and abuse issues; and ultimately, then, to provide the funds and build the new customer-centric facilities.

That is really the trend that we're on, which is analogous to what we're doing in the senior housing.

So we're very bullish about our opportunity to make new investments.

Okay.

Could you comment on your CapEx exposure for life science in the joint venture, if it's material?

No, Rich, I wouldn't call it material.

We have a reserve for it, but under the leases there, the tenants, these are more like absolute meta-leases, where we're responsible for kind of core and the roof, and the tenant is responsible for everything else.

We have an appropriate reserve there, but in the long term [needs, and frankly most of the buildings are newer.

We feel like we've been conservative, but not a high exposure to CapEx there.

Okay.

Just a quick one here.

Unfunded development, you mentioned $193 million of unfunded development commitments right now, but that number grows, right, over the course of the year if you're considering $300 million or $400 million of new starts.

Where do you think that unfunded development commitment number goes to over the course of the year?

It's Scott.

You're correct, included and necessary to get to the $300 million to $400 million guidance, it does imply a few new starts, and I think we said we are selectively looking at development, but again as a supplement to our acquisition growth this year.

So I guess it's tough to peg a number, but probably -- maybe another $100 million to $200 million is the number that would be necessary to get to the aggregate $300 million to $400 million of fundings this year.

Okay, so it's just simple math, really?

Yes.

Okay.

Then finally -- I didn't know what was in the $193 million already, I guess.

And finally, you mentioned the housing market impact on CCRCs and senior housing, but can you make that same analogy to the entrance fee model?

In other words, are you willing to start looking at that area as a place to invest, as you are with CCRCs and the more generic products?

We think that the rental units are going to come back faster, okay?

We think that there is real opportunity in the IL, AL maybe, dementia space, and that's going to be more of our priority because we think it's going to take off first.

We will look very carefully at potential buy-in opportunities, but they're going to have to be awfully good for us to be looking at them seriously during the next quarter or so.

But you never know.

Great.

Thank you.

Our next question will come from the line of Todd Stender with Wells Fargo Securities.

Hi, guys.

Hey, Todd.

First question, just on the new construction, the two facilities that you broke ground on in the quarter.

What's the impact of the economy having on your decision to break ground?

Were these on schedule?

Have they been delayed?

And what's the timing look like on the stuff you will break grounds on for the remainder of the year?

This is John Thomas.

The two medical office buildings we announced, one is a cancer center on Tallahassee Memorial Campus.

This is one where it's 100% [master] released to the hospital.

And frankly, the economy is allowing us to get building materials and other construction costs at lower than would have been two years ago, so it's excellent timing from a cost perspective.

The hospital system is delayed for a small period of time, but really no expectation, or there's no real impact to the economy on that project.

The on-campus building at Loma Linda is attached to the hospital that we are building for Loma Linda University Medical Center at Murrieta.

A very large project; again, if you know California hospitals and hospital construction, it's much -- you're trying to get as much outside of the hospital building itself into medical office buildings because of the [OSBOT] requirements, and just the cost per foot of a hospital versus a medical office building.

So that building is -- the completion of that building is near the opening -- near the same time as opening of the hospital is critically important.

And we've had tremendous success in pre-leasing with physicians, the hospital, and other institutional tenants in that building that are synergistic with the hospital there.

So again, same result as the economy, we were able to lower our budgeted costs on steel and concrete and other supplies, and frankly in that community providing a lot of jobs that are otherwise needed.

So we were very well received in that community.

Okay.

Thank you.

And Scott, for the HUD financing you're expecting later this quarter, I think it started at $85 million.

Could that come in still?

Is that number moving around at all?

I think it's moving around a little bit, Todd, but I think we're pretty comfortable that $80 million is going to closer to the final number and right around the 5% range.

And that should happen, we think, right before the end of the second quarter.

And how many skilled nursing facilities will secure that debt?

It's six.

And how long is that for?

Is that ten-year paper?

Yes, it is.

Okay.

Thanks, guys.

Sure.

Our next question will come from the line of Tayo Okusanya with Jefferies & Company.

Good morning.

Just a couple of quick questions.

In the supplemental page, I believe it's 31, the conversion estimates for Q2 2010, you mentioned that there's one fairly large CCRC project of $111 million, but you haven't been able to determine the yield on it yet?

I'll take that one, Tayo.

We're trying to be, I think, just more practical.

Contractually that yield -- initial yield was scheduled to be 10%, and that's how we were listing it in the supplemented previously, and I think we've pretty transparent in the likelihood that we think more like 6% should be the average start rate for most of our entrance fee communities.

So until we actually determine the rat,e and it's not finalized at this point, we felt it more appropriate just to put "to be determined" as opposed to a higher, unrealistic rate.

But you do expect it to kind of come in around the 6% that all the others have been coming in at this point?

Our average is 6%, and we haven't finalized this one yet.

Okay.

That's helpful.

That's the first thing.

And then, when I kind of think about your growth strategy, you're one of the few companies, if not the only one now, who is actively making acquisitions.

You've also begun some development as well, and your guidance seems to imply, again, and another $100 million to $200 million of development.

The way you're approaching things seems to be fairly different from what we've seen of your counterparts, except maybe say NHP, in regards to just how quickly you're moving to restart your growth engines, versus some people who seem to still be a bit more gun shy.

I'm just curious why you feel it's the right time to be as aggressive, when some of your peers still seem to be backing off?

First of all, I want John and Scott to comment on it, too, but we've used virtually every down period, whether it was the old change to a SNIP reimbursement years ago to this period, to really plan for additional acquisitions and development coming out -- out of a bad period.

So I think we've done a pretty good job over the years of planning for being prepared to move forward.

And we have a lot of relationships, both within senior housing and the acute care space, so that when we're ready to go, when we can alert our operators to that point, that they find great deals for us.

I mean they're an important part of John and chuck's marketing team, if you will, and I think it's just the ability to invest across the full spectrum, to provide other services, and because of the relationships that go back decades in some cases, that allows us to come out of the gate pretty quickly.

We think there are some very good values there.

We think we're building some awfully good facilities that will stand the test of time.

And so this has been our approach to doing business, and I think it's going to pay off very handsomely for us.

John, do you want to add?

Yes.

Tayo, I think -- I mentioned this in my comments before.

The certainly of health care reform has kind of unleashed hospitals to move forward with projects that they had pended last year, due to the economy and trying to assess what the health care reform legislation was going to look like.

We had a fairly deep pipeline of projects that were somewhat on hold with the hospitals.

I mentioned the Tallahassee Cancer Center, is somewhat of an example of that.

And again, with that certainty of reform, the opening of the capital markets, we're still seeing hospitals and still working with hospitals that see a necessity of moving forward more aggressively now than they were six months ago.

So we've got -- it's really very opportunistic, and strong occupancy on development and strong yields in this market.

Got it, okay.

Just one other question.

In regards to health care reform, I would appreciate it if you could touch a little bit on how you think bundling may end up impacting the post acute care world, especially with the LTACs, and as well as skilled nursing; if you're getting any indication of that at this point?

That's a great question.

I think the bundling, the legislation as written provides for demonstration projects that would last three to four years.

I think the hospital systems see some certainty that bundling will occur between the hospital and the post acute care settings, as I mentioned before.

So that means aligning within patient rehab, aligning with long-term acute care, and then over time reestablishing an alignment with certain skilled nursing facilities as well.

The bundling will take a few years to work through demonstrations, but again, the people primarily -- the primary authors of the legislation believe in bundling as a future necessity of controlling the both cost of care and the quality of care, and so hospital systems are seeing that necessity and trying to align with those post acute care providers, as I mentioned before.

Site of service neutrality is built within the concept of bundling by the payment systems, where if a patient can be treated in an inpatient rehab, a long-term acute care facility, or a skilled nursing facility, eventually site of service neutrality will pay each of those three facilities the same amount for that patient, something that the skilled nursing facility has been pushing for for some time, and had some success in establishing that as a long-term objective of the reform legislation.

Got it, thank you.

Our next question will come from the line of Michael O'Dell with AIG Asset Management.

Yes, just on the new disclosure on page 23 of the supplemental, could you give us a sense as to the thought process, one, around (inaudible) no longer breaking out, assisted independent living, and removing the interest fee portfolio.

And then also the coverage metrics on the operator level basis under the new disclosure, can you tell us what that would have been maybe Q4 and and then Q1 of last year?

Hey, Michael, it's Scott.

You're breaking up a little bit, but I think I got the gist of the question.

In regards to our decision to consolidate the IL and AL buckets into the senior housing methodology, if you look at it, it's actually about 80% of our assets there are combinations thereof, and it's generally similar disclosure in the industry.

I think you can look a few pages later, we did give the restated trends on senior housing, you can see the trailing results on a combined basis over a number of quarters.

And to answer your coverage question, I think coverage is down one or two basis points sequentially this quarter in the senior housing area.

Okay.

Good enough.

And then just on the equity interest investments and consolidated JVs, you reported the $298 million; how is that flowing through to the balance sheet, in terms of where is it being accounted for?

Because the equity investments are actually showing $165 million.

I'm sure I'm just missing something here?

The equity investment line is our equity component, it's about $160 million is new there this quarter, and the secured debt is about $142 million, and that is off balance sheet.

That is disclosed elsewhere in the supplement.

Okay, but it's not -- okay.

Our next question will come from the line of Jerry Doctrow with Stifel Nicolaus.

This is Dan Bernstein filling in for Jerry.

I wanted to go back to the deferred rent on the lease-up properties.

Now that you're disclosing the occupancy on your entrance fee CCRCs, do you have a general range of where that occupancy has to go before your operators will feel comfortable paying the deferred rent?

It's Scott.

How are you doing?

I think some perspective there as we look at that, you have to look at the aggregate portfolio with each operator, but if you look at an individual facility, and the decision to stabilize the three entrance fees that were stabilized this quarter, all have over 85% occupancy.

Once you get to about 80% aggregate occupancy, we think you can support a rental yield of at least 8%.

So that may be a metric you can think of in terms of watching aggregate occupancy, in terms of our ability to potentially start to recover some of these deferred rents over time.

Okay.

And also wanted a more general question on acquisitions.

Are you seeing any pick up in interest from the health systems to monetize their assets post health care reform?

Stan, this is John Thomas.

I would say yes, there was not a lot of system monetizations last year.

But I think it's fair to say we're in active discussions with a number of health systems today, looking for either monetizing existing assets or looking at refinancing, and new and different ways to begin to move forward with existing projects that they put on hold pending legislation.

But the number of calls and the number of -- the amount of activity has increased dramatically over the last 90 days.

Is it mostly focused on MOBs, or are they also looking to sell part of their hospital campus, LTACs?

I think very reluctant to sell hospitals, but looking at alternative financing for either hospital expansions or new hospitals.

The (inaudible) bond market is still somewhat a disruption.

And again, I think they're looking for different creative ways to finance their hospital expansions.

On the post acute care facilities, many of them are aligning with operators.

It's fair to say all of our operators are working hard to joint venture or otherwise establish relationships with hospital systems in a bundled environment, or future -- so there's more monetization and development opportunities for hospitals in that context.

And George, you mentioned that cap rates I guess are -- pricing is kind of in a low for acquisitions.

Do you see the cap rates coming down at all over the next, say, 12 months, given where cost of capital is today?

It's been really difficult to figure out how cost to capital and cap rates relate, if at all, during the last -- some of these periods of exuberance, irrational or otherwise.

So that's hard to answer.

I do not see cap rates going up, though.

There's a lot of competition, and I'm glad we have a broad reach and great relationships formed over many years, or this could be a fairly difficult senior housing acquisition marketplace.

I appreciate the comments.

That's all I have.

Thank you.

(Operator Instructions)

Our next question will come from the line of Michael Mueller with JPMorgan.

Actually, most of my questions have been answered.

Just one in terms of the presentation of normalized FFO.

You have acquisitions in the guidance, but it doesn't appear that you're putting the acquisition costs-- factoring that into normalized FFO.

Two questions.

Number one, what do you see as a general rule of thumb for the acquisition costs on a go-forward basis?

And secondly, why are you guys excluding that from normalized FFO?

It's Scott.

Mike, how are you doing?

This is the first quarter you're required to expense these transaction acquisition costs as they are incurred.

I think as we said, the majority of the costs this quarter were actually related to buying back the debt associated with the Aurora portfolio, and some of those charges.

So exclusive of that, I don't think the number is very large.

And basically, we'll provide it for you.

We'll break it out.

It's very hard to predict, because we don't know what we'll have from quarter to quarter, if any, and we'll continue to disclose it, and our opinion, we'll back it out of our normalized number.

And it's not included -- no additional costs there are included in our guidance.

Okay.

Okay.

Appreciate it.

Thank you.

Sure.

Our next question will come from the line of Dustin Pizzo with UBS.

Hi, it's Ross Nussbaum here with Dustin.

I'm looking at the supplemental on page six of the ambulance sheet.

Can you help me get my arms around the $78 million of loan receivable that's on nonaccrual?

What's going to be the resolution of that?

Hey, Ross.

I'll take a crack at that.

The number has, at least over the last year or so, remained at about that level, and I think we providing -- everybody gets general disclosure on our loan portfolio.

If you look at our loan portfolio in aggregate, it's down to about 6% or 7% of our whole Company, it's $444 million this quarter.

As we said, there's actually -- three of our operators that are in our top 10 actually make up about $260 million of that $444 million total, about 60% of that, and we're very comfortable with those loans.

And of the rest, really what's happened over the last year, we had -- we generally do have a handful of loans, the primarily composition of the loans that are on nonaccrual are the early stage senior housing operators, more the independent living, or have a sale component to them, and the number hasn't changed too much.

So I guess as you do your quarterly accrual assessment and loan loss reserve analysis, it's really contingent upon forward-looking and looking out oftentimes as many as five to seven years to assess the value of those loans.

And we think we're being conservative by not accruing any interest there, and unfortunately it takes a little bit of time to assess the ultimate value of the principal there.

So we choose to put them on nonaccrual, and as -- those sales and projects will take some time to evolve.

That's why it's stayed at the level at the level it's been at for awhile.

When do those loans technically mature?

I don't have the average for that in front of me, Ross.

Do you guys know that?

No, we'll have to get that one for you.

Okay, because I think where I'm going with this is, It would be great to get a page in the supplemental that maybe lays out the credit stats for that loan receivable category, to go through what's the debt service coverage, what's the loan to value, what rate are you getting, when do they mature; you know, what's in there, because other than that one number on the balance sheet, there's really no disclosure on it.

Fair enough.

We have received the question, and I guess I would just point out that it is 1% of the portfolio, but we do receive questions, so we'll try to evaluate that as best we can.

Thank you.

There are no further questions at this time, and I would like to turn the call back to Mr.

Chapman for closing remarks.

Thank you for your participation, and note that Scott will be available today for any follow-up questions.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.