Welltower Inc (WELL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Health Care REIT Earnings Conference Call.

My name is Bea 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 Jeff Miller, Executive Vice President, Operations, and General Counsel.

Please go ahead, sir.

presentation

Thank you, Bea.

Good morning, everyone, and thank you for joining us today for Health Care REIT's First Quarter 2011 Conference Call.

If you did not receive a copy of the news release distributed this morning, you may access it via the Company's web site at hcreit.com.

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

George?

Thank you, Jeff.

Good morning.

We are pleased to report that Health Care REIT experienced a strong first quarter in 2011.

Through the execution of our disciplined relationship investment strategy, we generated a 12% first-quarter return for our shareholders, and remain on target to deliver outstanding 2011 earnings growth of 8% to 11%.

The investments we closed in 2010 and year-to-date 2011 provide a foundation for strong future earnings growth.

The key drivers of this earnings growth include internal NOI growth generated through our core portfolio rent increases and RIDEA partnership NOI growth.

Our RIDEA investments are performing in line with budget through the first quarter, and remain on target to generate an average of 5% annual NOI growth over the next several years.

In addition, our investment pipeline remains strong, providing embedded growth opportunities through disciplined acquisitions driven by our existing partner base.

We will continue this disciplined growth profile going forward.

In 2011 to date, we completed nearly $4 billion in gross investments, including transactions with Genesis Health Care, Benchmark Senior Living, Silverado Senior Living, and Capital Senior Living.

We completed the closings of these portfolios on or ahead of schedule, which allowed us to raise our 2011 FFO guidance by $0.07, as these transactions will be immediately accretive to our earnings.

Health Care REIT's unprecedented investment growth of $4 billion in 2011 builds upon the momentum of the $3.2 billion of investments in 2010.

This extraordinary period of investment growth demonstrates successful execution of our relationship investment strategy, and will generate solid earnings and dividend growth over the next several years.

By investing in industry relationships for over 40 years, and providing a full-service value-add business platform, Health Care REIT has earned a reputation as the long-term partner of choice.

During this unparalleled period of opportunity and growth, we continue to strengthen and reposition our portfolio to capture investments that reflect emerging industry trends in the evolving senior housing and health care environment.

We are deploying capital, disposing of assets, and deepening our Management team in order to capitalize on the opportunities created through this period of change.

We are staying ahead of the curve in the way we evaluate asset quality using a comprehensive matrix that considers the quality of the asset in its entirety, including the physical asset, strength of operations, clinical quality, referral networks, and strategic geographic considerations.

This comprehensive approach to capital deployment is resulting in long-term consistent returns for shareholders.

Now let me take a moment and comment on the recent announcement by CMS regarding the proposed adjustment in payment rates for skilled nursing facilities in 2012.

The proposals presented by CMS are preliminary, and will go through a significant period of discussion.

The proposals will not materially affect Health Care REIT's payment risk, and we also believe the end result will consider the interests of all stakeholders, and likely be phased in over a period of several years.

Our current $1.2 billion skilled nursing portfolio as of March 31 had very strong rent coverage of 2.3 times.

Pro forma for Genesis, the coverage would have been a bit over 2 times.

These coverage levels are the strongest in our sector and have increased over 20 to 30 basis points over the last five years.

Additionally, 99%-plus of our skilled nursing portfolio has a rent payment coverage of approximately 1.7 times.

You should note in anticipation of the RUGs-IV payment rate adjustments, we conservatively underwrote the Genesis portfolio at approximately 2 times coverage, using a payment rate below the current RUGs-IV rates.

I should also point out that our industry-leading operators have proven adept at managing through reimbursement changes by strategically adjusting their business models and consistently managing costs.

Our operators active management, together with our strong portfolio diversification, coverage, and systems have resulted in consistent performance through many economic and reimbursement cycles.

And we remain optimistic that we will continue to successfully lead the Company through these and other challenges and opportunities presented by an evolving health care environment.

Through our active portfolio management approach, our Company has successfully managed and grown our Triple Net lease portfolio for decades.

We also actively manage and operate approximately 9 million square feet of medical office buildings across the United States.

We are now applying the same portfolio management discipline and experience to our expanded RIDEA operating partnerships, and we have built a customer-focused business platform to manage our portfolio relationships.

Our relationship managers are tasked with driving NOI growth in our RIDEA portfolio as well as growth in our Triple Net lease portfolio.

In addition, they serve as facilitators of best-practice sharing and potential synergy development, across our operator, provider, and tenant base.

In fact, on May 18 of this year, we will be holding our first Executive Forum, for the executives of our operating portfolio partnerships to begin this process.

This is an exciting period of opportunity and growth for Health Care REIT.

We are looking toward to our first annual Investor Day to be held at our corporate headquarters in Toledo, Ohio, on May 19.

Our Investor Day will provide a forum to meet and interact with many levels of our Management team, and the executives of some of our key portfolio partnerships.

Participants will also gain insight into Health Care REIT's business strategy, portfolio quality, industry-leading capabilities, and vision for the future.

I should again mention that so far, attendance has been terrific and we would encourage those of you who haven't made a commitment to attend to do so.

It should be a great day.

With that, I'll now turn the forum over to Scott Estes, our CFO for REIT financial and portfolio overview.

Scott?

Thank you, George.

Good morning, everybody.

As George discussed, we had very successful first quarter and are off to a great start to 2011.

Through early April, we've completed nearly $4 billion of new investments.

These investments have been entirely pre-financed with attractively-priced debt and equity capital, and are immediately accretive to earnings.

Most importantly, we believe these investments have positioned us for very meaningful earnings growth over the remaining three quarters of the year, enabling us to generate expected FFO and FAD per share growth in the high-single digits or better for the full year.

We also ended the quarter in a great balance sheet position, having financed all the deals announced year-to-date, without any significant changes to our credit metrics.

As of today, we have our entire $1.15 billion line of credit available, plus an additional $200 million of cash available.

Our first quarter performance was perhaps our strongest ever, with same-store NOI increasing between 3.4% and 3.8% across all of our reported asset categories, while our RIDEA and Life Science portfolios performed at or above our expectations for the quarter.

Our expectation for accelerating earnings growth over the next several years recently allowed us to increase our dividend by 5% versus the comparable quarter last year, while still positioning us to lower our FFO payout ratio to 80% or below by as early as 2012.

Turning now to the details.

First regarding our investment activity, we completed $1.4 billion of gross investments during the first quarter, and nearly $4 billion year-to-date.

The vast majority of these investments were announced throughout the first quarter, including our partnerships with Silverado Senior Living, Benchmark Senior Living, Genesis Health Care, and Capital Senior Living.

We also acquired 7 senior housing assets in the first quarter for an aggregate $113 million, with an average initial rental yield in excess of 8%.

All of these investments were brought to us through relationships with our existing operators.

Finally, we did sell two smaller senior housing portfolios for $44 million, generating $26 million in gains.

Turning now to the portfolio performance.

First, our stable Triple Net senior housing and care portfolio continues to perform quite well.

Senior housing payment coverage increased 1 basis point to 1.55 times, and occupancy remains strong at 88%.

Skilled nursing also remained strong, with payment coverage increasing 2 basis points to 2.38 times, and current occupancy stood at 85%.

We also generated strong same-store cash NOI growth rates within both the senior housing and skilled nursing portfolios during the first quarter.

Same-store senior housing NOI increased 3.5% versus last year, while our same-store skilled nursing NOI rose 3.4% year-over-year.

Next I'd like to discuss our senior housing operating portfolio, which is comprised of our RIDEA partnerships.

As of March 31, the operating portfolio represented $2.2 billion, or approximately 22% of the total portfolio.

First quarter results include a full quarter of performance from Merrill Gardens, Senior Star and Silverado, while the Benchmark portfolio performance is only included for the last four days of the quarter.

Including the investments completed subsequent to quarter end, our RIDEA partnerships make up approximately 17% of the total portfolio investment balance.

As you can see in the supplement, the blended occupancy across our four operating portfolios is 89.8% as of March 31.

And with a portion of both the Silverado and Senior Star portfolios still in fill-up, we believe our operating portfolio occupancy has room to increase over the next several years, providing a source of increasing NOI and earnings growth.

As George mentioned, first-quarter results out of the operating portfolio were almost exactly in line with underwritten expectations.

And as we mentioned last quarter, we continue to expect the operating portfolio to generate average NOI growth of 5% or better over the next several years.

Moving now to the medical facilities portfolio, first in regards to hospital portfolio.

First-quarter stable payment coverage remains strong at 2.6 times.

We again experienced solid 3.5% same-store NOI growth in our hospital portfolio during the first quarter versus last year.

Our medical office portfolio also had another strong quarter, with occupancy at 93%, and trailing 12-month retention of nearly 80%.

We also generated excellent same-store growth, as first-quarter same-store cash NOI increased 3.8% year-over-year, exceeding our internal projections, and was actually the highest same-store quarterly NOI growth since we began investing in medical facilities five years ago.

Our Life Science portfolio also continues to perform better than initial underwritten expectations.

Our lease renewal activity continues to be very encouraging, as the first two leases which roll over this year have been renewed at rates approximately 40% above current rates.

As a result, we are increasingly confident that we will meet or exceed our long-term NOI growth expectation of 5% or better in our Life Science portfolio.

Turning now to financial results -- we reported normalized FFO per share of $0.70 and normalized FAD per share of $0.62 for the quarter.

First-quarter earnings include $0.08 per share of capital carrying costs as a direct result of pre-emptively raising $3.5 billion of capital in early March, most all of which remained in cash on the balance sheet for the remainder of the quarter.

The cash was promptly deployed to fund the $890-million Benchmark and $2.4-billion Genesis transactions that closed on March 28 and April 1, respectively.

I think importantly, the ability to close all of our major transactions on or ahead of schedule positions us for very significant quarterly growth throughout the remaining three quarters of the year.

Our G&A expense was $17.6 million (sic - See Press Release) for the first quarter, which included $3.9 million of accelerated expensing of stock and options for certain employees and directors which normally occurs in the first quarter.

And for the remaining three quarters of the year, we would expect a G&A run rate of approximately $16 million.

Regarding our dividends, we recently declared the 160th consecutive quarterly cash dividend for the quarter ended March 31 of $0.715 per share, representing a 5.1% increase over the same period last year, and an annualized rate of $2.86.

In terms of our capital activity, as previously announced, we successfully raised $3.5 billion of equity and unsecured debt capital in March, which enabled us to fund our unprecedented acquisition volume thus far in 2011.

We also issued 574,000 shares under our dividend reinvestment program, at an average net price slightly above $48 per share, generating $28 million in proceeds.

And no shares were issued under our equity shelf program during the quarter.

Next, I'd like to take a minute to discuss our current liquidity position.

As I mentioned, we raised $3.5 billion of capital during the first quarter, generating sufficient proceeds to pay for all investments announced year-to-date.

The recent debt offering extended our average debt maturity to 10 years.

And as a result of this capital activity, as of March 31, our cash balance stood at $2.7 billion.

After paying for the $2.4 billion Genesis transaction, and $141 million Capital Senior Living transaction, which included $48 million of assumed debt that closed subsequent to quarter end, we currently have a pro forma cash balance of approximately $200 million.

In addition to this surplus, as previously mentioned, we have our full $1.15 billion line of credit available.

We have started the process of renewing our bank line, and hope to increase our line of credit capacity to between $1.5 billion to $2 billion by the end of summer.

As a result, I think we're in an excellent capital position, and note that the increase in our line of credit would provide important flexibility to allow us to come to market to raise permanent capital less frequently than we have in the past.

Turning to our credit profile, we remain comfortable with our debt-to-undepreciated book capitalization at 44.6%, and our secured debt to total assets is 12.9%.

Our interest and fixed charge coverage of 3.1 times and 2.6 times, respectively, are slightly lower than our historical average, solely because of the unique circumstance of raising $3.5 billion of capital that was not deployed until the end of the quarter.

Over the next quarter or so, we would anticipate our interest and fixed charge coverage to move back to their historical averages of approximately 3.5 times and 3 times, respectively.

In addition, we will look to move leverage down from current levels over time.

More specifically, looking to move debt-to-undepreciated book cap down closer to the 40% level from the current 45%, and to maintain net debt to EBITDA at 6 times or below.

Finally, I'll just take a moment to review our updated 2011 guidance and assumptions.

We do remain comfortable with our most recent earnings guidance, which increased 2011 normalized FFO to a range $3.32 to $3.42 per diluted share, representing strong 8% to 11% growth over 2010 results.

Our 2011 FAD expectations remain unchanged, at a rate of $3.01 to $3.11 per diluted share, representing 6% to 10% growth over the last year.

I would like to take a brief moment now to give you some additional perspective regarding our earnings per share over the next three quarters.

By simply adding a full quarter's impact of the Genesis and Benchmark acquisitions, and a full quarter's impact of our March capital activity, we are positioned to generate very strong normalized FFO and FAD growth over the remaining three quarters of the year, prior to the benefit of any additional investments which may occur.

More specifically, our second quarter earnings run rate in terms of normalized FFO is currently in excess of $0.85 per share.

As we mentioned last quarter, our investment guidance does not include any investments beyond what have been announced at this time.

So as a result of what has been completed year-to-date, we have increased our net investment guidance from the previous $1.2 billion to $3.7 billion.

Our gross acquisition guidance of $4 billion represents an increase of $2.5 billion, which is primarily comprised of the $2.4 billion Genesis acquisition and the $113 million of additional investments completed in the first quarter.

Finally, we do continue to expect dispositions of approximately $300 million for the full year.

With that, Operator, that concludes my prepared remarks, and we'd like to now open the call for questions, please.

(Operator Instructions) And we do have a question from Jana Galan of Bank of America.

Hi, good morning.

I was wondering if maybe we could get a little bit more color around that potential CMS, Medicare SNF cut, and are there any individual tenants that you could see potentially bumping along the coverage ratios?

Hi, it's Scott.

I'd like to provide a little more color for you and everyone.

I think we've seen our portfolio and the industry manage through reimbursement cycles many times.

That is why we do underwrite to specific coverage of about two times in our skilled nursing portfolio and I would note coverage is up about 20 to 30 basis points over the last four or five years.

Thinking about the impact of what was announced, the decision, in our opinion, to issue two proposals by CMS signals, I think, the need to discuss and acknowledges the meaningful uncertainty of only using three months of preliminary data.

As a result, we're probably in the camp of most people where we think the most likely outcome will be somewhere between the positive 1.5% to the 11.3% reduction, and potentially be phased in over a period of time.

In the past, I think one main point in our current portfolio, it actually doesn't reflect the full impact of the RUGs-IV benefit and as we looked at our portfolio, and even some of the public companies have started to report generally you see Medicare rates up 10% to 15% per day.

So we've not even seen that impact in our coverages.

Even as we think about coverages, which again are very strong at 2.4 times currently, those are the key numbers to even start from and don't even yet reflect the full benefit.

And the one thing I might clarify too from George's comments, we actually did look at the stratification of our existing portfolio, and we found out that 99% of our operators within our portfolio cover in excess of 1.7 times.

Thank you.

That's very helpful.

And does it change your thinking at all about the Genesis operating exposure option you have, being that this is likely to be a continued issue?

Well, we look at this as a triple-net lease investment to begin with, with the opportunity to benefit at some appropriate time as a result of our option.

And now, there's another overview comment I'd add to Scott's.

Over the years -- over a 42-year history doing skilled nursing, skilled nursing has always been a very cost-effective platform, probably the most cost-effective, efficient platform in health care.

And while the approach or the services have changed a bit, we've certainly moved to much higher acuity customers, folks that used to be in hospitals, we've also moved to shorter lengths of stay, which has maintained the reputation of skilled nursing as a very cost-effective way to deliver necessary care.

I really would add -- my general comment would be that we really think the enhanced collaboration between the SNF operators and CMS and the others, and working off common data that they will drive, should lead to a very palatable final rule.

Thank you very much.

Your next question comes from James Milam of Sandler O'Neill.

Good morning, guys.

I just want to ask one more question on the Genesis underwriting.

I was just wondering if you guys could give us a little more color on some of the sensitivities you ran, and I guess where coverage would go if RUGs-IV, in effect, weren't implemented, so under a RUGs-III methodology?

Also, how you guys look at the growth of that portfolio, if for example, the worst-case scenario were to come to pass where the full reduction were implemented?

Finally, maybe just talk about if the full reduction is implemented, what you think that could do to pricing for acquisitions in the SNF market.

I'll start and then I'm going to turn this over to Scott Brinker, who's in charge of our underwriting team.

Generally, when George Hager and our group did this deal, our goal was to move up to -- after management fee -- coverages of two to one.

So we think we have significant upside in this portfolio, and we'll do very well regardless of the outcome of these proposed rules.

We also think we have a lot of opportunity with George, in general, to add to his platform, make it even more cost-effective.

In terms of pricing of additional acquisitions, perhaps there will be some effect, but we're going to have to wait a bit until we see what the final rules are.

Scott, do you want to comment?

Generally on underwriting?

Yes, I'm happy to.

This is Scott Brinker.

We underwrote the transaction to sort of a hybrid between the rates that had been in place in 2010, in what potentially would be in place under RUGs-IV, and that's really the 1.5 coverage that we had given to the public.

It's unlikely that rates will decline by the amount that's been released by CMS, but nonetheless, we think rates will at least be at a minimum what they had been prior to the ruling.

So coverage in the 1.2 to 1.3 range, to us, is the low end of expectations.

Genesis has been very successful over the years in managing through reimbursement cycles, and we would expect them to do the same here.

If I could add too, Scott -- this is Scott Estes.

We did speak with George Hager over the weekend and as Scott said they're thinking about the changes.

I would point out -- you're right that specifically a worst-case scenario ignores their ability to lower cost, which I know they're thinking about, and it also, I think more importantly, ignores their ability to increase quality mix over time.

As we talked about, we're looking for about 55% quality mix this year, but the ability to expand to the mid-60s over the next five years or so, as we've talked to many of you about is, I think, much more important and speaks to George Chapman's comment about why we were comfortable with a lot of upside in terms of coverage in that portfolio.

Okay, great.

Thanks.

That's helpful.

Can you guys also just talk a little bit about the dispositions you have left or planned for this year, and what you're seeing and expecting in terms of timing and pricing on those?

Sure, James.

I think $300 million is our best estimate at this point.

It's a mix of generally skilled nursing assets, as well as some senior housing assets.

Looks to me that about $110 million of what has not happened yet is several loans.

And if I had to weight the portfolio, it looks to me that about $150 million of it could actually happen in the second quarter.

So I'd weight it earlier in the year from this point out.

Okay, so the $150 million, that's in addition to the $50 million that was done in the first quarter?

Yes.

That figure's $26 million in the first quarter, so probably $150 million or so in the second, and then you could model it evenly throughout the last two.

Okay, great.

My last question -- can you guys just talk about the development portfolio, just giving the sense if everything is still on track and on time?

Then maybe could you give us a little color on this Nashville development that we saw some press reports about?

Just in terms of what the plan is there, and how that fit into the overall Health Care REIT strategy?

John Thomas.

Yes, this is John Thomas.

I'll start with the Nashville project.

That is a development site that's adjacent to the HCA headquarters and HCA's flagship hospital there in Nashville, where they are land-constrained.

We have an MOB there and there's also a large physician practice facility on the location.

So between Vanderbilt and some life sciences opportunities, and other discussions in that market, and the HCA campus opportunity, we had kind of an inside track on the opportunity to purchase that.

We will not develop that until leases are signed, as our general practice and we'll take a conservative approach to that.

We're having very good discussions with a number of institutional tenants about the potential there.

And the plan is to do health care-related facilities, not to do some mixed-use -- it sounds like from the article, mixed-use residential, retail, restaurant, et cetera, but it's still going to be health care-focused, is that correct?

It will be our core competency of either direct health care, life sciences, health care related to the academic opportunities in that market.

The mixed use development and the other things is really the broader plan that the city has for that location.

The key driver of this was the mayor's plans and development of a bridge connecting that site to West End Avenue.

So again, very opportunistic and very good inside opportunity for us and again, we will not move forward with the development until leases are signed and consistent with our normal conservative development practices.

As far as the rest of our development portfolio, we moved three projects to completion in the first quarter.

One, Loma Linda University Medical Center Physician Office Building a month early, and at 98% occupancy.

We just had the grand opening of that facility yesterday but rents commenced in March.

Other projects that are in the development right now are on time, on schedule, and frankly moving ahead of schedule in most cases, in a very conservative, high-occupancy fashion.

Great, thank you.

That's it for me.

Your next question comes from Rich Anderson of BMO Capital Markets.

Thanks, good morning, everyone.

Good morning, Rich.

First, I apologize, maybe this is an ignorant question, but I'm going to ask it anyway.

If you're talking about increasing the quality mix at Genesis, correct me if I'm wrong but doesn't that kind of put you more in the cross hairs of the CMS proposal?

Well, Medicare -- this is Scott Brinker, speaking -- Medicare would still be much more profitable than the other payers, so any improvement in mix would almost for certain improve payment coverage, even in a worst-case, when the full 11% cut was enacted.

Okay.

But from a growth perspective, it could be a negative.

But anyway, I just wanted to make sure I understood that issue.

The question I have -- we're trying to work through our model is -- you talk about a $0.39 annualized positive impact from Genesis, and you raised guidance by $0.07 at the end of the day, understanding there was capital raising and all the rest.

Can you kind of walk through the specifics of how closing Genesis when you did, which is very early on in the second quarter, why the actual accretive component to 2011 was so much lower than $0.39?

Sure.

Hi Rich, this is Scott.

I think the best way to think about it is, you're correct, we advertised an annualized impact of the Genesis deal at $0.39 to FFO benefit and $0.29 to FAD.

I think by closing the deal on April 1, the three quarters of the year would reduce the $0.39 and $0.29 to about $0.29 and $0.22, respectively.

And then you would lower each of those numbers by about $0.22.

And that resulted then in the $0.07 net guidance increase on FFO and maintaining FAD guidance flat.

The components of the $0.22, by our estimation, are the $0.08 of capital carrying cost from the capital we raised in March and probably about $0.12 from up-sizing our deal.

Basically by sitting here in a position where we have our line available and actually sitting on cash, as opposed to having a little bit of borrowings on the line -- probably about $400 million to $500 million difference -- makes a very big difference to the tune of giving us future earnings growth potential by having that whole line capacity available.

But that would be relative to our previous guidance.

The other small piece was Capital Senior Living deal closed in April, versus what we had originally estimated to be February.

I think those are the pieces that should hopefully connect the dots for you.

Okay.

Going back to Genesis, what would have been your coverage without the hybrid analysis, but just RUGs-III?

Scott?

Yes, Rich, this is Scott again.

That's the number I had mentioned earlier, roughly 1.2, 1.3 times.

Okay.

You called that the low end of expectations, but if I'm correct -- maybe you can enlighten me -- if the most draconian of scenarios, the 11% plus decline, would be worse on a net basis than RUGs-III would be.

Would it not?

It depends on the operator, but it would be pretty close in terms of per diem rates.

Okay.

Scott, Rich, I'd like to comment, too.

I think Scott made -- the other Scott, Scott Estes -- made a very good point, and that is that all of these operators are very adept at responding to, if not getting ahead of, some of the new proposals or final rules, and George Hager and his team are already working on significant cost reductions, as well.

So I think we're going to adapt very well.

Okay.

Last question.

Can you comment about the situation with your SNF portfolio in terms of master leases and how you're cross collateralized and protected against any kind of cherry-picking situation?

Sure Rich, this is Scott.

I don't have the skilled nursing specific number, but our senior housing and care portfolio is generally about 90% of the portfolios in the master lease.

So the vast majority of our portfolio -- and the skilled nursing portfolio has generally been around longer -- Chris, wouldn't you say, is it virtually all?

It's virtually all.

Virtually all, we think, of the skilled nursing portfolio would be in a master -- larger master lease.

Okay great, thank you.

Your next question comes from Karin Ford of KeyBanc.

Hi, good morning.

Just a question on Page 24 of the supplement, the Senior Housing Operating Portfolio.

The occupancy dropped 110 basis points between 4Q and 1Q.

Is that just a mix issue and the addition of some properties in fill-up in 1Q?

Yes, Karin, you're exactly right.

The addition of both the Silverado and Senior Star -- I guess Senior Star was in there in the fourth quarter -- but Silverado has a number of assets were in fill-up.

And that portfolio is slightly lower, somewhere in the mid-70s occupancy-wise.

So, in aggregate we reduced the number there just slightly, but that's the only reason.

Do you have a same-store occupancy number there or just a number excluding the properties in fill-up?

I don't in front of me, but I know from our general expectations, I'd say the overall portfolio, we do think there's room to improve occupancy.

I would categorize the Merrill Gardens and the Benchmark portfolios as stable -- and you're in the low 90s% occupancy -- and then you have the Senior Star and Silverado portfolios, due to some fill-up assets, somewhere in the 70s% and growing quite nicely.

It comprises the remainder of the portfolio.

Okay.

And what type of rate growth are you seeing in, say, like the Merrill Gardens portfolio?

Would one of you guys care to comment?

The last I had spoken to Steve, it was approximately 3% to 5% rate increases.

Would you guys agree with that?

Yes.

3% to 5%, is the approximate rate bumps we've seen in that portfolio.

Okay, great.

Last question from me is just on the investment opportunities from here.

George, I think you said a few times in your opening comments, you used the word "disciplined." Are you sort of planning to take a slower approach, given the large amount that you've done in recent months?

Can you just talk about the size of the pipeline that you have today of investments, and what the composition is of it today, as well?

We're not going to comment on the size of the pipeline.

But we continue to see really good projects.

But we were -- I think all of us -- a bit surprised at how large our investments were in 2010, and early 2011.

I think probably it will slow a bit, but we never know.

If you look at HCP, and Ventas and ourselves, we've had a great run and there is still consolidation occurring in senior housing, and for that matter, we at Health Care REIT who do a lot of MOBs and acute care are seeing some opportunities as well in medical facilities.

We're just not prepared to predict, Karin, how large our pipeline might be, but we continue to see very good opportunity.

Are they generally portfolios, entity-level deals?

And which asset type are you seeing more or less of today?

We're still seeing more senior housing, increasing numbers of SNF packages.

We're seeing entity potential deals.

We're seeing it all right now.

I think everybody -- it is really an amazing, consolidating sector at this point.

Great.

Thank you.

Your next question comes from Jerry Doctrow of Stifel Nicolaus.

Thanks.

A lot's been covered.

I wanted to come back to just a couple of other things.

So the entrance fee CCRCs still, if I was reading the supplement right, looked like the entrance fee component was sort of stable.

I think those are backward-looking numbers for the fourth quarter, making a little progress on the rental side.

Can you just give us a little more color about what's going on there, and maybe bring us up to date, since we're almost a quarter past what the data was?

We just had Donald Thompson in, our largest CCRC operator, and they are doing particularly well on the rental health care component, even adding units to his facilities, and filling them very quickly.

The CCRCs continue to move at pace, Jerry, not unduly quickly.

The economy, and especially the housing market hasn't turned up, so it's just going to be very much blocking and tackling, and he's doing a very good job with it.

We're pleased with our portfolio.

So you're seeing a little bit of incremental sales, and your occupancy on the entrance fee side but not much.

Is that another way to--?

That's right.

But in some of the facilities where we repositioned them, including Greenville, we've seen very good growth in terms of occupancies, even on the entrance fee side, and where we've repositioned another facility, as well, to add even more wellness, as well as a SNF component that we think will drive some very good growth in that as well.

Stephanie Anderson, do you want to comment?

Yes.

The pending move-ins, our entrance fees that actually have deposits have increased significantly over first quarter, so we'd expect to see those moving in, as well as the operating income is ahead of budget.

I don't know if Stephanie or back to George -- and your CapEx has got some expansions.

Are those mostly those same properties, if I was reading it right?

They are.

They're the health care components of the properties, and those will be opening in second quarter.

We expect those to do very well.

Great, thanks.

Again, I would echo Karin's comments about it would be great to get some same-store stuff.

You gave out a couple numbers on senior housing, but just your sense of occupancy rate movements, particularly as we get into first quarter here or maybe outlook.

You gave a little color, but how comfortable are you feeling with the performance on the operating assets?

I'll take that one, Jerry, this is Scott.

I'd say we're very comfortable.

What we're seeing on the rate side, and obviously we can try to give you guys some sense, we obviously did not have these assets in our portfolio a year ago, thuswe began reporting once we did acquire them.

Because you have the environment where you have some assets in fill-up, I think if you all recall when we announced these deals we were basically assuming 5% longer-term NOI growth out of the Merrill Gardens and the Benchmark portfolios, and that's what they have generated historically.

And then even, for example, Silverado, I recall, it was an increase of 7.5% return this year, going to 8.5%, talking about 13% growth.

Senior Star is a similar, much more significant growth.

So I think putting it all together, and if you look at the same-store results this quarter, because of the assets in fill-up, the percentages would be extremely high.

So again, long-term, we still think everything's filling up nicely, and are comfortable at 5% or better on average for the portfolio for the long term.

Last one for me, and I don't want to beat this to death.

On the coverage numbers on the Genesis stuff, there was a lot of numbers thrown out.

So when you talked about the 1.5, your original underwritten numbers, which was a hybrid between three and four, and then you talk about it being two now, and then I think you talked about it worst case being 1.2 to 1.3 -- so are those trailing twelves, current quarter annualized, pre-management fee, post-management fee -- just to make sure I understand what the numbers are that I'm hearing?

Jerry, the two to one is pre.

The 1.5 or so is after, and Scott, you want to comment on the 1.2, 1.3?

Yes, that would be after management fees as well, Jerry.

Okay.

So if today they're running about two to one, pre-management fee, one to five, post-management fee, and it might go down to 1.2 to 1.3, if we were back to a post-management fee, if we were back to RUGs-III levels.

Is that correct?

Assuming no cost changes and no quality mix improvements, et cetera.

Yes, worst case.

Yes, okay.

And all of those, should we would be thinking of kind of a current quarter annualized, or when you're saying two to one, is that sort of trailing 12, or that's kind of where we stand today go forward?

On the two to one, that is where we stand today, and also pretty consistently since RUGs-IV was implemented.

Great.

I think that's all for me.

Thanks.

Yes.

Your next question comes from Todd Stender of Wells Fargo Securities.

Hi, thanks guys.

I think my question is more geared towards John Thomas.

You mentioned there's three MOB projects recently moved to completion.

Can you just go into some of the details surrounding those?

Timing, location, some of the initial yields you're expecting?

Yes, those were -- this is John.

Two of those are in the northwest, anchored by a leading hospital system.

They are large ambulatory free-standing emergency rooms with physician office space.

Great affiliated suburban projects and again, as I mentioned, they opened early and the occupancy on those is right at 80%, counting the hospital and the free-standing physician space, and yielding close to 8%.

The largest project was the Loma Linda University Medical Center physician office building, 160,000 feet.

As I mentioned it opened a month early, at 98% filled, and the initial yield's right at 9%.

Okay, thanks.

And just re-filling the development pipeline, what have you recently broken ground on, and what does that look like for the next three quarters?

On the medical, groundbreakings have been larger -- 100,000, 150,000-foot affiliated medical office buildings, pre-leased at least 80%.

I think our overall development pipeline of what's broken ground and pre-leased is closer to 85% to 87%.

And all with leading health care systems, all affiliated.

The largest project under construction right now that's referenced in the book is almost a 300,000-foot physician office building for the new Virtua hospital campus in Voorhees, just not too far from Philadelphia.

And that project is about 85% pre-leased at this point and includes a substantial amount of hospital space and thus, hospital leasing.

Okay, thanks, John.

This is probably geared towards Scott.

What's the buyer profile look like when you look at if you're separating the dispositions into your loan book and then the real estate?

Who buys the loans and then currently is it really current operators buying your real estate?

Virtually all the current operators either repaying the loans or buying the real estate back.

Okay, thank you.

Sure.

Your next question comes from Tayo Okusanya, Jefferies & Company.

Yes, good morning.

Again, back to the CMS-type question.

The reduction in the coverage ratio if you do end up with the cuts of 11.3% going to 1.2 -- I guess my question is when I do look at all the different RUGS categories, you do notice that all the rehab and therapy categories are getting bigger cuts.

Most of those cuts anywhere between 15% to 20%.

And just given the higher per-diem rate that Genesis has within their own portfolio, it seems to suggest they have more exposure to these categories that are going to take bigger cuts.

So, how do you get comfortable if the number really goes to 1.2 when it seems like the percentage of cuts that they get may be higher than the 11.3% average that Medicare is putting into place?

This is Stephanie Anderson.

We actually have -- the cuts were out last week.

We spent a lot of time over the weekend re-underwriting everything, make sure we understood the impact to our portfolio, as well as specifically to Genesis.

Those numbers that we discussed and analyzed with Genesis, and we're very comfortable with them.

That's helpful.

And if coverage does end up at the 1.2 times, which is great that they're covering the rent, but if you do look at Genesis or any other skilled nursing operator out there, by the time you're factoring their interest expense and any other leases they may be paying for assets that you don't own, and all the other kind of general current obligations, it seems to suggest that quite a few nursing homes, or skilled nursing facilities, will start to become negative cash-flow entities.

I'm just kind of curious how sustainable that would be before this starts to become pressure on the rent.

We do not see that with the case with any of our post-acute and skilled nursing operators.

We are very comfortable with where they are.

Specifically in the case of Genesis, they do have the opportunity to convert some of their lower-paying days to Medicare, improving the overall coverage.

We still have great faith in improving coverages due to their strong expense focus, as well as their continued focus on the post-acute area.

Okay.

And then last question -- what's your outlook like at this point on Medicaid and could that also be an additional double whammy, in addition to the Medicare that issues we're facing?

Go ahead, Stephanie.

I can see specifically, we just -- as part of the discussion when we looked at the Medicare, the CMS proposal, we also did get into the Medicaid discussion, because as you know, CMS often today is very aware and is looking at an overall reimbursement to the post-acute and skilled nursing facilities.

Our Genesis portfolio, as well as many of the other states, are still ending up with a positive Medicaid increase of 1% to 2% in the states that we operate in.

So we're not seeing the negative impact everyone was concerned about.

So essentially you're getting by July 1 when states set their budgets, Medicaid will be up probably 1% to 2% in the states you operate in?

Yes.

I can tell you, Tayo, talking to George Hager yesterday, they currently believe their fiscal 2012 Medicaid average rate increase will be positive 1%.

That's interesting.

Okay.

And then Scott, just going back to the senior-housing operating portfolio, along Karin and Jerry's recommendations, is there any way going forward we can get a sense of what's going to be going on, or what's going on individually in many of these key portfolios?

I noticed from the disclosure this quarter that you started to lump everything together.

But I think it would still be helpful to get a sense of what's happening in each of the deals simply because they were all so large.

I understand.

We hear your point.

We do think of it, though, as an aggregate portfolio, and I do -- I know we'll be happy to give same-store results in the aggregate portfolio.

And we will endeavor to -- strive to give everyone a sense of how the individual components are doing.

Okay.

That's all for me.

Thank you.

(Operator Instructions)

Stephen Mead, Anchor Capital Advisors.

If you look at what happened in 2011, my perception it was kind of an opportunistic year for the three major healthcare REITs.

And as the capitalization and the balance sheets have stabilized, at a much lower cost of capital.

Going back to the question about acquisitions and the yield on acquisitions, and the kind of environment that you kind of see going forward in terms of continuing to put money to work at an accretive rate.

And at what point would you say let's slow down a little bit here?

Well, I think that all of us should be looking at when the pricing becomes difficult to justify there -- the pricing, frankly, has moved up as some of the larger transactions have been announced.

We'll just see who applies the discipline and who doesn't.

We certainly look at that every week and understand why you're asking the question.

We do internally as well and presumably Jay and Deb are doing it as well.

We'll see.

What are yields now looking at?

You moved down probably 50 basis points or so on assisted living, and in independent living has always been sort of a mystery as to how low they can go, depending on quality of the assets.

Jerry Doctorow, Stifel Nicolaus.

Thanks.

I actually wanted to see how you were feeling about development, George, a follow-on to Steve's question.

You've always done a fair amount.

I think you've always talked about the need to be at -- ahead of the curve was the phrase used on this call.

I think people have been sort of nervous a little bit about some of the CCRCs, but are you seeing good development opportunities?

And how big a piece is that going to be of the business go-forward?

Well, we clearly -- exactly right on the CCRCs.

We're not doing more, but we're doing fine with them.

They're very good assets and probably in many respects, the continuing care geriatric senior housing is going to be the wave of the future, with a very small percentage allocated to buy-ins.

So I wouldn't worry about that, but in terms of how we run the Company, we're, you know, at 4% development right now.

As you well know, we've had great acquisition opportunities, both in senior housing and in John's space on the medical facility side.

So we're not going to be doing a lot.

We have some limits that we sort of placed as goals on both Chuck Herman and John Thomas.

But we, on the other hand, do believe that especially right now in medical facilities, that the opportunity to take advantage of the need for capital in great health systems and the ability to pre-lease at 80%, 85% level presents some opportunity that we're going to seize.

But we think those kind of developments, where we move directly from development to stable are pretty attractive.

But we're always going to measure our development.

Jerry, this is John Thomas.

I failed to mention -- and should have -- both in March and in April, we completed two large hospital projects as well, so everything we've currently in process or under the near-term starts are large ambulatory care centers.

Every one of them, all of it, affiliated with leading healthcare systems and all of it's coming through our relationships that -- where they look to us to help them grow their organizations.

But Loma Linda, we just completed that hospital, and they started paying rent in April as well, so you'll see that the next quarter.

But that was a $220 million hospital project.

Everything we've got under construction right now is very conservative, but larger ambulatory care centers affiliated with hospitals.

Jerry, I think that our goal is to not only do some state-of-the-art, customer-centric facilities but also use this as an opportunity to deepen our relationships, like we've done in senior housing and to do more monetizations of their more modern, existing facilities as well.

So we have a clear goal to deepen relationships with 10, 15 hospitals as we go along and to continue do all of their business, not just the development.

And on the senior housing side, you do some, but maybe more carefully underwritten?

I think we tend not to do sort of Greenfield developments with new customers, with very small exceptions.

It's mainly master-lease deals with some of our great operating partners or our triple-net lease partners, who we've been in business for 10, 15, 20 years.

We feel very comfortable with that, and as you know, the development is not keeping pace with the growth in demand.

And it's a very good time to do very selective development to add to an already very strong master-lease portfolio.

Thanks.

And there are no further audio questions at this time.

Mr.

Chapman, are there any closing remarks?

No, we just again, all of us, thank you for your participation, and we will be available for follow-up questions as needed.

Thank you.

Thank you, ladies and gentlemen.

This will conclude today's conference call.

You may now disconnect.