Welltower Inc (WELL) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter 2011 Health Care REIT earnings conference call.

My name is Brooke 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 the call over to Jeff Miller, Executive Vice President, Operations and General Counsel.

Please go ahead, sir.

Thank you, Brooke.

Good morning, everyone, and thank you for joining us today for Health Care REIT's third-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 website 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 risk 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 now like to turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT.

George?

Thank you, Jeff, and good morning.

Health Care REIT's relationship investing strategy continues to produce strong financial results.

In the third quarter, we generated year-over-year FFO and FAD per share growth of 13% and 7%, respectively.

We have increased our 2011 FFO guidance and now expect growth of 10% to 11% this year.

We believe that this earnings growth, together with the acknowledged high quality of our portfolio, have both contributed significantly to share value creation.

The portfolio continued its strong performance generating same-store NOI growth this quarter of over 4% and our relationship investing strategy resulted in investments of $650 million in the third quarter and a record $4.8 billion year-to-date.

We continue to see a healthy pipeline of private pay, senior housing assets, concentrated in coastal markets and larger MSAs as well as [MOB] investments affiliated with leading healthcare systems.

Nearly all of these investment opportunities are derived from our long-standing industry relationships.

The third-quarter data released by the National Investment Center, NIC, last week confirmed the positive trends and resiliency of our industry.

The report showed that industry fundamentals and senior housing occupancy and pricing are strong despite a volatile economic climate.

Overall, improvement was particularly notable in key metropolitan markets, markets that represent a substantial part of our senior housing portfolio.

These encouraging industry trends align with the overall positive performance of Health Care REIT's senior housing portfolio again this quarter.

The health care REIT sector generally has been a very steady performer during the current challenging macroeconomic conditions.

Historically, health care REITs have produced stable growth and steady cash flows even in highly volatile markets.

Current demographic trends, limited supply and favorable access to capital are contributing to a positive outlook for the industry.

The consistency of cash flows, portfolio diversification and excellent liquidity are providing an opportunity for long-term value creation with less risk than other asset types, an appealing option for many investors.

Our Company has demonstrated this consistent growth and value creation through its relationship network.

We define our unique relationship investing strategy with the words relationships, results and returns.

These words make an important point.

Specifically, they connect the dots and explain how our Company's relationships create meaningful portfolio results and ultimately generate shareholder returns.

I will now walk you through the success of this quarter, using that strategy.

First, relationships.

The nearly $650 million of gross investments we closed this quarter are reflective of that relationship investing strategy.

The majority of the investments for the third quarter are acquisitions at an average yield of 7.3% in primarily high-end private pay seniors' housing and medical office building investments.

These premier investments are the result of existing industry relationships and further strengthen our industry leading portfolio.

And I should add that I believe this quarter's investment volume in a particularly difficult overall environment speaks to the consistency and predictability of the HCN relationship-based approach to investing.

As mentioned during my introduction, even in the current climate we have a healthy pipeline of investments.

In senior housing we are pursuing newer, high-quality properties located in strategic geographic markets.

In our senior housing operating portfolio, we now have the youngest average asset age among our peer group and 90% of the properties are located in the top MSAs or East and West Coast markets.

We are also focused on operators that are generating strong financial results including steady cash NOI per unit.

For MOBs, we are focused on newer, larger properties affiliated with leading investment-grade systems and we are pleased that our stable of partners is strong and growing.

In fact, through our relationships, we have built the most balanced and diverse operator base in the industry which is generating additional investment growth, especially in a climate of industry consolidation.

Next, on results.

Our relationships have created the foundation from which strong financial results are built.

Recent investments have created a high-performance, high-quality portfolio.

Our third-quarter investments were primarily private pay, high-end senior housing, and medical office building assets.

All of these contributed to the quality of our portfolio.

We are particularly pleased with our new $308 million [triple net] lease partnership with Chelsea Senior Living, a highly respected and quality provider in the Northeast.

This transaction includes the acquisition and leaseback of 10 combination senior housing communities in New Jersey and New York, with a 2012 lease rate of approximately 7%.

Our partnership with Chelsea is a continuation of our strategy to partner with premier operators with high-quality assets; and this investment also contributes to our increasing presence in East Coast markets.

Information relating to the Chelsea transaction is posted on our website.

In addition to the Chelsea transaction, this quarter's investments included $146 million for 630,000 rentable square feet of medical office buildings and these high-quality medical office building assets are primarily affiliated with health systems and are over 90% occupied.

We continue to see strength in our portfolio diversification with no one asset type representing more than 30% of the investment balance.

We are focused on the growth of our assets supported by private payor sources, as evidenced by most of the investments made this quarter.

Our private pay mix within our portfolio is nearly 70% which we plan to increase to over 80% in the next few years.

With respect to Genesis, we continue to be impressed by George Hager and his team.

George presented to our Board of Directors last week in New Jersey and reported the continued successful execution of the Genesis business plan.

They are making appropriate adjustments necessary to accommodate reimbursement changes and with George's geographically clustered portfolio and his team's well-deserved reputation for quality care, we remain very excited about our partnership, and our ability to help George and his team further develop Genesis post acute platform that is a critical component of the evolving healthcare system.

Now returning to our portfolio update discussion, we are pleased to report that our MOB portfolio is now over 10 million square feet and maintains 93% occupancy, the highest in our peer group, and our retention rate was 84% during the last 12 months.

We also continue to pursue our coastal concentration strategy where our dominant presence in these markets creates numerous strategic advantages.

And as it relates to the portfolio generally, 75% of our total portfolio is located in attractive East and West Coast markets or in one of the top 31 MSAs and, finally, our total portfolio is producing solid same-store NOI growth for the quarter of 4.2%.

So in sum, our portfolio concentration is highly reflective of our strategy and is leading the industry in a number of areas.

We continue to solidify existing relationships and form new partnerships with the best senior housing operators and health systems in the marketplace, creating relationship-based future growth opportunities.

And now, returns.

The most important component of our strategy is the way that we are creating reliable and meaningful returns for our shareholders.

In the third quarter alone, we generated significant earnings growth, an FFO increase of 13% from the third-quarter 2010.

We have access to reasonably priced capital, a strong balance sheet, and conservative payout ratios.

Based on the strength of our existing portfolio, confidence in our future pipeline, and earnings growth potential, we have increased our normalized FFO per share guidance to 10% to 11% growth over 2010.

And in addition our Board increased our 2012 dividend payments to a level in excess of 4% over 2011 payments.

I'd now like to take a moment to welcome a new addition to Health Care REIT's Board of Directors.

As recently announced, Dan Decker has been named to our Board.

Dan has nearly 20 years' experience in the senior housing industry including playing a key role in over $2 billion of investments.

And Dan's prominent leadership and extensive experience in the industry will add tremendous value to the Company's long-term goals for growth and shareholder returns.

Additionally, I would like to highlight a recent corporate governance change enacted by our Board of Directors.

On October 27, our Board of Directors approved declassifying Board membership.

So beginning at the May 2012 annual meeting of shareholders, directors who are nominated will be elected to one-year terms.

Our Board's decision is consistent with Health Care REIT's continued focus on strong corporate governance and best forward practices.

In closing, Health Care REIT's relationship investing strategy and high-quality portfolio continue to create shareholder value.

Our year-to-date total return of nearly 14% exceeds our industry peers.

We are also proud of the 16% total return we've delivered to shareholders since inception in 1970.

We have built a portfolio that is producing solid same-store NOI growth based upon an industry -- or an investment strategy that is providing ongoing opportunities that strengthen and diversify our industry-leading portfolio.

Most importantly, we are generating strong financial results and delivering value to our shareholders.

With that, I will now turn to Scott Estes, our CFO, for a brief financial and portfolio overview.

Scott.

Thanks, George, and good morning, everyone.

As George discussed, we continue to add attractive new investments to our portfolio having now completed a record-breaking $4.8 billion of gross investments year-to-date through September.

Our portfolio continued to perform well in the third quarter highlighted by blended same-store cash NOI growth at 4.2%.

Our strong same-store performance and success on the investment front generated another strong quarter of FFO and FAD per share growth, while our confidence in our future growth potential enabled us to announce a dividend increase earlier this week.

At this point, our portfolio diversity by operator and our rent payment coverage levels remain among the strongest in the sector, providing greater certainty that we will continue to be paid our rent through the current government reimbursement cycle.

Finally our balance sheet remains strong and we have ample liquidity with over $1.7 billion of line capacity and cash on hand at the end of September.

Turning to the details of the quarter.

Regarding investment activity, as George mentioned, we completed $644 million of gross investments during the third quarter.

This consisted primarily of $569 million of acquisitions at a blended yield of 7.3%.

The most significant of these investments was our $308 million Chelsea Senior Living transaction detailed in our press release and on our website.

The other significant acquisitions were two medical office building portfolios affiliated with health systems for a combined total of $124 million at a blended average NOI yield of 7.3%.

In terms of dispositions, we sold three smaller properties and had a few small loan payoffs totaling a combined $16 million, bringing dispositions year-to-date to just under $300 million.

Based on our fourth-quarter disposition projections, we have increased our disposition guidance for the full year slightly to $350 million as we continue to recycle capital into new assets to further enhance the quality of the portfolio.

All around, we are pleased with another excellent quarter on the investment front for the Company.

Turning now to portfolio performance, as you may have noticed we changed the appearance of our supplement a bit this quarter, as this new format facilitates a more automated reporting process for us internally while streamlining the presentation of the data for the investment community.

In terms of our portfolio, first our stable seniors housing and care portfolio continues to perform in line with expectations.

Our seniors housing triple net lease payment coverage stands at a solid 1.4 times while occupancy remains 88%.

We also generated strong 4.4% year over year same-store cash NOI growth within the seniors housing triple net lease portfolio during the third quarter.

Now I will provide a brief update on our skilled nursing portfolio, including some comments regarding Genesis.

We continued to believe that skilled nursing facilities are the most efficient cost-effective settings for providing healthcare services.

Our skilled nursing post-acute portfolio remains focused on a relatively limited number of key relationships with strong operators.

To that point, including Genesis, nearly 90% of the EBITDAR in our skilled nursing portfolio is generated by our top seven skilled nursing operators.

And importantly, as a result of adding the Genesis portfolio occupancy of 91% to the portfolio average, our overall skilled nursing occupancy increased a full 2.5 percentage points in the quarter to 88%.

The last time our skilled nursing portfolio was at this occupancy level was 1995, or 16 years ago.

Our most recent cash flow coverage is listed in the supplement for the trailing 12 months ended June 30 with a strong 2.3 times.

This includes one quarter of the Genesis portfolio impact.

Annualized for the full impact of the Genesis portfolio, our current skilled nursing portfolio coverage stands at 2.1 times.

And our latest view regarding Genesis's operating performance remains unchanged from last quarter's call.

Specifically, we continue to expect the Company's corporate level fixed charge coverage to be approximately 1.3 to 1.4 times in calendar 2012.

There's also obviously been a lot of discussion of late regarding an individual company's ability to adapt to the current skilled nursing operating environment and we think really cutting through it all, we believe there are three distinct factors which differentiate our Genesis investment.

First they have a geographically concentrated portfolio in the attractive Northeast and mid-Atlantic markets, they've greatly enhanced their IT platform which allows for optimal therapy utilization and labor efficiency and, probably most importantly, they have the ability to significantly better quality mix over the long term.

As a result we do remain highly confident in Genesis's continued ability to pay our rent.

At this point, I will provide a brief update on our senior housing operating portfolio, which is comprised of our RIDEA partnerships.

The blended occupancy across our four operating portfolios increased 30 basis points versus the prior quarter to the current 86.6%.

In addition, our same-store operating portfolio NOI for the third quarter increased 8.2% versus the comparable quarter last year, driven by a combination of a 70 basis point occupancy increase, a 4% revenue per occupied unit growth and a slight expansion in margins.

Our operating portfolio continues to perform in line with expectations and we remain comfortable with our NOI growth expectation of 4% to 5% over the long term.

Moving now to the medical facilities portfolio, our medical office building portfolio performed well in the quarter with, as George mentioned, occupancy remaining at 93.3% and a trailing 12-month retention at a solid 82%.

Our MOB portfolio generated same-store cash NOI growth of 1.7% for the third quarter.

In regards to our hospital portfolio, cash flow payment coverage remains strong at 2.6 times.

And we again experienced solid 3.7% same-store cash NOI growth in our hospital portfolio during the third quarter versus last year.

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

For the first time we began reporting same-store results on this portfolio this quarter and are pleased to report same-store NOI growth is 6% which was driven by our first lease renewal in 2011 at rates roughly 40% above their previous levels.

Turning last to financial results, we reported normalized third-quarter FFO per share of $0.89, up 13% versus last year's quarter, and normalized FAD per share is $0.79, up 7% versus the comparable quarter last year.

Quarterly performance was driven by the internal growth generated by our existing portfolio combined with our success investing profitably throughout the year.

We recently declared the 162nd consecutive quarterly cash dividend for the quarter ended September 30 of $0.715 per share representing a 3.6% increase over the same period last year.

In addition, the Board of Directors approved an increase in our 2012 quarterly dividend rate of $0.74 per share or $2.96 annually, beginning with the February 2012 dividend payment.

As George mentioned, our 2012 dividend payment rate represents a 4% increase over dividends to be paid in 2011.

In terms of third-quarter capital activity, we issued 669,000 shares under our dividend reinvestment program generating over $31 million in proceeds and we issued 743,000 shares through our at the market program, generating an additional $37 million in proceeds.

At the end of the quarter we had over $1.6 billion available on our $2 billion line of credit and had an additional $136 million of cash and cash equivalents.

At the end of September our debt to undepreciated book capitalization stood at 46.6% while secured debt to total assets was 13.6%.

Our trailing 12-month interest and fixed charge coverage remained solid at 3.1 times and 2.5 times respectively with net debt to adjusted EBITDA slightly over 6 times.

Over the longer term, we will continue to look to drive debt to undepreciated book capitalization down toward the 40% level.

And net debt to EBITDA to a range of 5 to 6 times.

Finally, I will review our updated 2011 guidance and assumptions.

Based on the strength of third-quarter results, we are increasing our FFO guidance by $0.035 at the midpoint to a range of $3.38 to $3.43 per share.

This represents strong year-over-year growth of 10% to 11% and our updated FAD guidance of $3.03 to $3.08 per share also represents solid growth of 7% to 8% versus last year.

And as a final reminder, our earnings guidance does not include any investments beyond what we've announced in the third quarter, while our disposition guidance increased slightly to $350 million for the full year of which $298 million has been completed through September.

That concludes my prepared remarks and I think, Operator, we would like to open up the call for questions, please.

(Operator Instructions).

Jana Galan with Bank of America.

Thank you.

Good morning.

I understand you primarily focus on your relationships to drive investments, but I was curious what you were seeing the market right now and how much in each of the different asset classes?

There are a number of decent-sized packages in both senior housing and in the MOB space.

But fewer than, say, a year ago.

And I think there's probably less of a tendency to go to market.

People seem to be linking up with favored partners more than even at least a year, two years ago.

John, you want to comment on MOBs?

John Thomas.

There have been very few hospital monetizations over the last couple of years.

There is a package out now in Scottsdale that everybody is very familiar with, but not a very large package so --.

Most of our attention is to our relationships and building new relationships and that is where most of our pipeline is coming from.

Chuck Herman, do you want to comment a bit on senior housing?

Yes, I think our operators are generating some decent investment volume.

A lot of off-market transactions that are coming our way because of that, but relatively few large packages, as George stated.

Thank you and I think after the third-quarter acquisition activity, the senior housing operating NOI is now maybe around 14%.

I was wondering if you've -- where you think that should be in your portfolio longer term?

That is correct.

It is about 14% at this point.

And I think we would consistently say that we will probably continue to have opportunity to grow with our existing operators and continue to look at additional RIDEA investments opportunistically.

But that is probably a good place to think it would be for the intermediate term.

Somewhere in the current 14% maybe up to 20% level.

Great, thank you.

Jeff Theiler with Green Street Advisors.

Good morning.

I saw you structured your Chelsea Senior Living bill as a triple net lease.

Previously you have been doing a lot of RIDEA stuff.

Do you want to talk -- can you talk a little bit -- is there something about the portfolio that lends itself to a triple net or is it -- what is your thinking behind the structuring?

Chuck Herman.

I think -- we structured that transaction, we felt that it aligned with our -- the best interest of both parties.

So that's what we agreed to.

Not -- RIDEA does not fit every operator nor is it the desire of all parties.

So we have options on how we can structure and in this particular case, we felt triple net lease was the appropriate structure.

Yes, but not a change in philosophy necessarily going forward, just this happened to be the right one for --?

I think that the better way to look at RIDEA versus net lease is exactly as Chuck indicated that could be the portfolio is very attractive for us to do RIDEA, but perhaps the operator doesn't want to do it.

Other operators came to us in part because they wanted to do business with us, but they -- others like to do deals as joint ventures.

So it isn't really the choice alone for the capital partner.

It is a partnership, and I think it just -- it's just situational and in this case they elected to do a net lease and we are just fine with that.

It adds significant quality and size to our very strong focus in the Northeast.

All right, makes sense.

So cap rate is a little bit lower I think than we have seen on recent triple net deals.

Is part of that due to the mark to market rent structure in years 4 and 9?

And I guess can you kind of walk me through the mechanism of that?

Sure, Jeff.

It's Scott.

Yes, I think this investment has what I would call higher than average increasers as a part of it in terms of the bigger picture.

And the short of it is through 2015, rents would increase at a fixed rate of about 2.6% per year on average.

And then at that time, there will be a fair market value reset, but the increase will be no less than 3.5%.

And really from that point through 2015 through 2019, the growth is at a rate of at least 3% a year.

So in general, you have some benefit from the fair market value resets and probably on average with increased rents, we think, 3% a year.

I guess and then lastly, I noticed last quarter you stopped reporting EBITDAR coverage and focused on cash flow coverage as EBITDARM, with the M.

I just want to get your thoughts around the thinking behind that.

I think that is a metric that a lot of people look at -- the EBITDAR coverage and especially when you are comparing portfolios like Genesis quarter to quarter that was initially talked about as an EBITDAR coverage metric.

Just kind of your thinking about taking that out of the supplemental.

Sure, I'll answer that one.

Frankly we find there's a lot of inconsistency in how coverage is reported across our sector, and management fees are subordinate to our lease payments and I think again they have also been imputed inconsistently throughout the industry.

So our view is we will continue to provide the cash flow coverage and help you guys talk about if you want to imply a management fee you can get to an after management fee number, but that was in essence our thinking around doing that.

Thank you.

Derek Bower with UBS.

George, we have heard you talk a lot about the pipeline for senior housing and MOBs.

But is there anything on the skilled nursing front that you are currently underwriting?

Or do you think the market is more of in a wait-and-see mode depending on what comes out of Congress in the near future?

I think it is a little slower right now.

We will look at individual transactions, either acquisitions or development for one of our -- what is it six or seven key operators and to help them.

But you are right in some sense that until there is a little bit more clarity, it's a little more difficult to underwrite it at this moment.

So everybody is going a little more slowly than the past.

But I echo what Scott said.

We think that, despite a very unfortunate decision by the White House to take way too much reimbursement away, that skilled nursing is by far the most effective delivery system for care in the whole system and will be favored over time and will be very successful, very successful and a key part of the healthcare delivery system for many years to come.

So I think we're just waiting for clarity and then we look forward to, as I said in my comments, helping George and the rest of the Genesis team and, for that matter, other of our key operators build out a system that really works in the evolving healthcare delivery system.

And I think Ross has a follow-up.

Good morning.

On the balance sheet front, really given the widening of spreads in the [secured] market, I am guessing that it's an avenue you want to (technical difficulty).

So how do you think about your funding needs over the next, call it 12 months on the right-hand side of your balance sheet with respect to [converts] that are coming due as well as your development funding and [flows in the average]?

Hey, Ross, it's Scott.

You are breaking up a little bit, but it seems like you are asking about just unsecured and secured pricing and kind of just for prospects on financing outlook going forward.

So I'll give a quick overview on that.

Let me know if I missed anything.

I guess the advantage for us is I think we have a lot of flexibility as we think about our capital needs.

That's why we put a $2 billion line in place.

And I think that's the most important.

As it relates to debt pricing, there's been a lot of movement in that market obviously as well as the overall markets.

I would peg a current new 10-year unsecured note for us probably in the 5.75% to 6% range based on current treasuries and spreads and pricing.

In the secured debt market, basically we have -- I think we have some availability in that bucket, 13.6% currently, but again we tend to assume debt that is already on properties that we acquire.

And again, in terms of equity as we've said, I think over the longer term, we do have slightly more conservative leverage goals, as I mentioned in my prepared remarks, of closer to 40% debt to undepreciated book and 5 to 6 times net debt to EBITDA.

So you would expect us as always to be looking at that market, too.

And can we assume that the converts that are coming up here in a month or so are going to get taken out on the line?

I guess you could, although we put out the notification there's $126 million of convertible debt that's putable to us on December 1.

The reality is those are actually in the money, the conversion price is I think what about $[47.10] or so?

So we are actually $5.00 in the money and at least our expectation if dependent upon our stock price at this point is those would probably remain outstanding, but we will wait and see there.

James Milam with Sandler O'Neill.

Good morning.

Just a quick follow-up on the capital question.

The nice increase in the dividend, I'm just curious how you guys and the Board are thinking about increasing that over time and if you are trying to -- I think you could have increased it more, but are you trying to retain a little capital going forward?

Or what do you think about in terms of payout ratios?

It is always a balancing act.

To some extent we try to lower our payout ratios a bit and we are making a lot of progress there and yet unlike a lot of other of our colleagues, we see a great pipeline and so we have plenty of use for the money as well.

So it always is a tough balancing act.

I think we came out the right place, but people can differ.

Is there any kind of a -- I mean obviously the taxable income floor, but is there sort of a minimum payout ratio that you guys would want to exceed over time or a minimum growth rate that you would look at?

Right now, we are about where we want to be.

We might drive it a little lower.

This economy and the attitudes of people swing so dramatically from starting to feel like the market wants to go up now and then we have a Greece situation that comes in, everybody gets conservative.

So I guess we are right now sort of erring a bit on the side of being somewhat more conservative in how we are running our balance sheet and how we are looking at our liquidity.

But it wouldn't surprise me in the least to have a totally different conversation in our next earnings call.

So it just takes a hell of a lot of judgment right now and a balancing act to run any public company.

Great, thank you.

And then my second one, it looked like CSU did a couple of -- bought a couple of new assets.

Did you participate in that?

And if not, can you just remind us what the obligations are of your operators to show you deals and for you to participate in any transactions that they do?

They bought -- with the Capital Senior Living, they are a public company and they have the ability to go and do assets -- do deals outside of our relationship.

And in this particular case they wanted to grow on balance sheet versus off-balance sheet.

We still have an excellent relationship with them and expect to be continuing to do business with them over the long term.

Each relationship we have is different, so the majority of the time we have a right of first option, right of first refusal on new deals and have lines of credit with many of our -- lease lines of credit with many of our operators.

So that is why we tend to see a lot of business.

And when you are focused on relationships, that drives volume our way.

Great, thank you.

Bryan Sekino with Barclays Capital.

Good morning.

I know some of the RIDEA assets that you recently acquired have a fill-up component to them.

Can you kind of give us some perspective on how the operating assets progressed in a lease-up perspective?

Sure, Brian.

I guess I would just generally say they are doing well.

I think a few of the port -- actually it's only about six buildings, so of the 99 total, six are in aggregate and fill up.

The portfolio is doing well.

They continue to fill and that's actually I think a big benefit when you think about our overall NOI growth potential and why over the last two quarters, we have generated the 4.6% growth last quarter and the 8.2% growth this quarter.

Stephanie Anderson is running our RIDEA platforms.

Stephanie, any other color?

Yes, I mean overall our operators are doing really well.

There's so many different levers that they can pull to drive occupancy and the lease-up continues much as you would expect with all the concerns in the economy but just continue.

We continue to lease up and have a positive momentum.

Thanks.

Thank you.

Karin Ford with KeyBanc Capital Market.

Good morning.

George, just want to follow up on a comment you made earlier that, given some of the volatility in the capital markets and then the economy today, you might be running your balance sheet a little bit more conservatively.

Have you changed your return expectations on new investments at all as a result of that as well?

Or perhaps maybe your growth assumptions on things you are looking at underwriting for future acquisitions?

Right now, we are tending to get most of our new transactions from existing customers and we are doing the best we can to accommodate them.

We are clearly looking harder at our returns and to the extent new parties come to the table, we are probably being somewhat more selective, careful in terms of giving them commitments.

But we try to keep everything in place that we can that looks good to us in terms of reasonable returns going forward and building relationships.

But at the same time, not disadvantaging anybody in the event that the capital markets turn down.

So again I just reiterate what I said earlier, it's a very interesting balancing act for all those running this Company and for that matter, our colleagues in the rest of the healthcare REITs.

The only thing I'll also add is that all of us are doing pretty well in the healthcare REITs and have probably better access to capital and better opportunities in a better industry in a sort of a choppy economy than virtually any other property type.

Thanks for the color.

Second question, just appreciate the update on Genesis, your pro forma Genesis coverage for 2012.

Does that incorporate an additional 2% Medicare cut under the automatic plan that could come down the line?

And if it doesn't, have you run a sensitivity on what that impact might be?

Scott.

The numbers that are articulated on the call really include basically what's known at this point, includes -- including their assessment of the therapy impact, inclusive of our full rent bump and net of their estimate of cost mitigation.

To your specific question about the potential for the 2% sequestration cut, it's not included, but again that's unknown.

It would not go into effect until January of 2013 and it would be again a net cut.

So if there are any market basket increases it would be net of that.

The sensitivity answer is basically still the same for us as it has been.

Each 1% reduction in overall Medicare rates, if you hold all else equal, translates into about 3% to 4% of an impact to our coverage.

Again so 2% would obviously be roughly six to eight basis points, but again, I would importantly reiterate there could always be some netting out of some cost savings.

That's helpful.

Just final question, what was the pricing on the dispositions that you sold in the third quarter and what you've got teed up for sale in the fourth quarter?

The dispositions in the third quarter were assets that have been in our portfolio a very long time and were very small amounts.

There is only $16 million in aggregate.

I think the blended average was at 8.5% to 9%.

I think a fair estimate for the last $50 million in our guidance would be something in the range of 10% probably of a disposition yield.

Thanks very much.

Jerry Doctrow with Stifel Nicolaus.

Thanks.

A lot has been covered, I just have a couple of quick things.

Shifting to MOBs, it looks like you saw a little bit of occupancy slippage sequentially.

One of your competitors reported the other day noted some significant rent rolldown.

So I was just curious if we could get a little color on the MOB and whether there's rolldown we should worry about?

John Thomas.

We saw a very slight bump.

It was more of a timing on the occupancy and we expect to finish the year making that up and strong.

So far this year, we are a little ahead of budget on tenant ramps and rollups or increases.

So it's -- we are still averaging 1.5% to 2% on renewals and retention rates continue to be in that 80% to 85%.

So we wouldn't expect any meaningful rolldown.

And construction, I went through some of the construction material you had on the website today.

Clearly you seem to be comfortable with construction remaining a decent chunk of your business.

I was wondering if I could get a little color on the CCRC lease-up and, just, you're thinking about construction, how much you are comfortable doing, that sort of thing.

Maybe I will start off trying to answer it.

Yes, we still like selective construction.

It is a pretty small part of the aggregate portfolio right now.

I believe we only have about $450 million of total projects underway.

I think most importantly, we are focused on triple net lease, senior housing assets with existing operators that would likely roll into master leases.

And the other main focus would be largely almost in many cases almost 100% pre-leased medical office buildings.

So that is the majority of the type of projects that we believe are low risk and get also nice returns in terms of the additional construction that we may do.

In terms of your question about the CCRC and entrance fee fill-up, they actually progressed pretty well this quarter.

The entrance fee component, those assets increased from 54 to 56%.

And I would actually point out one nuance in the portfolio in terms of what we report in the supplement.

The rental occupancy is reported at 82%.

The number was actually down if you just compare supplement to supplement, but that was because we added over 100 new units this quarter.

So the previous quarter's number, existing portfolio would have increased about 91.5% I think it was, prior to the effect of adding some new units.

So and we added those because a lot of our rental component of those facilities actually had a wait list.

So as we mentioned before, we have added some new units which is a positive because we needed some additional capacity.

And just in terms of how all that plays down into any future rent bumps, I mean if we are assuming sort of a continued steady climb on the [entrance] fee, when might you bump rents again?

Or where does that stand?

We are looking at that right now.

We hope to have another rent bump of perhaps the same magnitude as last year and we are going slow on it.

The rental is doing great.

The healthcare is doing great and the entrance fee is sort of just chugging along, making progress in a very choppy economy.

So it is going to be very deliberate.

It is going to be modest and we are just going to keep moving along.

And probably something like January 1.

Probably.

Thanks.

Nicholas Yulico with Macquarie.

Good morning, everyone.

Looking at the senior housing construction portfolio, I see there is a good chunk of the units being dementia care.

And I'm just wondering how that affects your underwriting since dementia wings are obviously very important to the ultimate value of the facility, but tend to be more costly for an operator to run.

We've had great luck, great luck with investing in dementia care.

It's a great driver of value in our sector and it's been very solid covering parts of our portfolio.

We like it a lot and we are doing business with people who can provide either the full continuum through adding dementia care or folks that are particularly skilled in providing dementia care, maybe higher end dementia care, such as Loren Shook at Silverado.

So we are very pleased with our investments in that area.

Great.

And then, I was wondering if you had actually some statistics you could share on what percentage of your existing senior housing properties either have dementia care units, whether you had a percent of beds number or even just a percent of total properties that have some portion of dementia care?

I think probably we should get back to you on that.

Need to research that, obviously quickly for you, we don't have that one right here at the table.

Good question.

Okay, thanks.

Rich Anderson with BMO Capital Markets.

Good morning.

Just getting back to the Genesis fixed charge coverage, you identified and reiterated at a 1.3 to 1.4 post some of the known issues.

One of the known issues you mentioned was the cost savings that they are looking to incorporate.

But when you talked about them, you talked about quality mix improvements.

You talked about geographical footprint.

But I didn't hear anything about specifics on where they could become more efficient from a cost perspective at the property level.

Can you share some of that color?

We are not going to go into all of their cost savings.

That gets into a lot of very much private information for George.

But obviously, there are ways to deal with travel, with wages, bonuses, and what have you.

And we are very much aware of the fact that George and his team have been very aggressive in terms of resolving these issues with the least effect on their staff to which is, I think, one of the best if not the best in that sector.

Scott, do you want to add anything?

I will comment just briefly and let maybe Stephanie make a comment as well.

But I would say I really still get back to they are doing a great job in doing everything they can do on the cost front.

I really think the most important differentiator is their quality mix over time.

Opportunities for Genesis.

I mean, again, didn't mention it on this call, but the ability to move from the low 50s up to potentially 60% to 65% over the longer term really is an important opportunity.

We calculate that each 1% improvement in quality mix would increase their coverage by six basis points.

So obviously having that type of an opportunity, I think, is a real important part to not focus so much on all the moving parts near term, but really the long-term opportunities at Genesis.

Stephanie, you want to talk about anything in particular?

Sure, Rich.

Just to give you kind of a more broad highlight on areas that are a focus is they have really spent some time talking to their long-term vendors as well as their employees and other partners and are setting expectations of cost sharing and they've been very successful in that.

They are continuing to focus on delivering quality care and that will be -- continue to be their main focus and there will be overhead savings at the corporate as well as the utilization of technology in the therapy delivery, and just work flow benefits that they have with bringing people in and out of their therapy gyms.

So there are a lot of things that they have a list of opportunities and really just making the entire quality of care even better that they will be focusing on.

So, let's say a year from now it's 1.35 times fixed charge coverage for Genesis.

I mean, where are you comfortable -- assuming you would hope to see that number go up, I mean where are you comfortable in terms of coverage for that portfo -- the quality of that portfolio?

We are comfortable that Genesis, HCR Manor Care, , Life Care Centers and the other quality senior skilled nursing operators can handle this situation again like they've had to handle it many, many times.

We obviously would like to have our skilled nursing after management fee coverage more like 1.5 or so.

And so we are not happy, no one is happy about what we think was cutting into muscle and bone by the White House.

We think it is a mistake.

But we have the ability to get back up to our desired level and above it in the very near

That's fair.

And then, just a big picture question for you, George, and whomever.

You guys obviously continue to be big-time investors buying a lot of assets through your relationships and all the rest.

Do you worry at all about becoming almost too big or are you anywhere near that in terms of --?

From the standpoint of economies of scale or maybe that's not the right word, but it becomes harder and harder to grow the Company and it becomes this big boulder that keeps rolling down the hill and getting bigger and bigger, harder to grow.

Do you ever, ever want to say, maybe we should just sit back for a couple of years and enjoy the size of the Company that we've done so far and grow off of that base as opposed to getting and making the base bigger and bigger?

We have never grown just to become larger.

And we continuously dispose of properties, even some that are at 9% and 10% rates because we think some of those properties will not be as attractive in the new healthcare and senior housing environment.

So we are always very aggressive about managing our portfolio.

This just happens to be a period in which the health care REITs have wonderful access to capital, equity, and debt at very attractive rates and there is consolidation going on in the operator worlds.

And we are going to run hard and we are doing very well vis-a-vis our closest competitors in terms of getting the best and the brightest.

And I think it's just one of those time periods.

Just wait a year or so when a lot of the packages are gone and then we will have the ability to do that $1.5 billion to $2 billion a year with our relationships and there won't be that many transactions out there.

So it is going to be a very different world in a year or so.

It's just a very unique time period.

Thanks very much for that cover.

Michael Mueller with JP Morgan.

I was just wondering if you could walk through some of the detail behind how you got to the 4.5% or 4.4% comp NOI growth on a same-store -- or triple net senior housing portfolio?

Sure.

Most of the -- I think you are referencing the 4.4 same-store seniors housing triple net -- ?

Yes.

Cash NOI growth, okay.

There's some benefit, really two factors, some catching up this year in terms of rents where we didn't get the full increase in the prior year and the other factor was the increase in the entrance fee properties this year versus last year.

It is a little bit above what you would probably expect to see on a more normal, call it 2.5-ish percent rate of growth in the portfolio.

So, the entrance fee component, that specifically ties to the deferrals, the rent deferrals that are coming back now?

Yes.

Jorel Guilloty with Morgan Stanley.

Good morning, gentlemen.

It seems overall that the RIDEA portfolio is performing well despite the macro headwinds that are in the economy.

Do you believe though that at any point these macro headwinds could cause RIDEA growth to soften below your expectations?

It is sort of hard to answer that question.

Could there be circumstances in the economy that could slow the growth in RIDEA?

Yes.

I mean, there could be, but we think we have a very reasonable balance between triple net and RIDEA structures and we have also, so that we will manage any risk such as that.

Also our experience, frankly, looking back at our RIDEA partners it's such that it's very unlikely that the growth would go below at least the triple net regular increaser.

But is it possible that we will have slower growth?

Yes.

And probably the best way to look at RIDEA is sort of averaging out the rate of growth over a number of years and maybe even averaging out certain sections of the country that may be up while the others are down.

So that is sort of how we present it to you.

We think overall that we are going to get a better return on RIDEA over time than with a net lease.

Okay and my other question is regarding one of the asset classes that you purchased this last quarter.

You went in -- you purchased some hospitals and looking at supplemental, you actually haven't gone into that space in a while.

What motivated the purchase of hospitals in this quarter?

John Thomas.

That was with one of our existing good relationship clients.

It was pursuing an acquisition consolidation within the LTAC space.

And we have been with post [acquisition] with in-patient rehab and LTAC we have been concentrating on select investments with our existing operators and that particular operator is one of our better clients.

So good assets, good pricing, and there's some opportunity for some upside in the company related to that transaction.

Good coverage to it, I would add, John, I mean projected to be in excess of cash flow coverage in excess of two times.

Correct.

And where do you see hospitals over on your portfolio?

You were saying earlier that you see a -- where do you -- senior housing as being about 14%, 15% of your portfolio.

Where do hospitals line up there?

You know in the 5% to 10% total and we wouldn't -- we would see it at the lower end of that range with growth.

Again mostly with selective clients that we already have for great new opportunity.

We opened a hospital with [LOMA] this year that has been a great investment with a medical office building that's been open, completely full.

So we are getting 9 plus percent yields from a great institutional client like that.

So pretty selective and primarily with existing clients and just on the mix of assets in that range and as Scott mentioned, we are focused on 2 to 3 times coverage ratio.

I think too, to add to that, John, is that as we see the world evolving, it could be that our initial relationship with the hospital could be to do hospital.

But where we think health systems are going is more toward outpatient facilities, more preventative care and, hopefully, these relationships that could start with the hospital investment will lead to a lot more of the modern post acute or outpatient facilities that we really think are going to be the drivers in the future.

Thank you.

And I don't know if you mention this earlier, I might have missed it.

But did you provide the current quality mix for the Genesis portfolio?

Scott?

Going into this year, I believe it has increased over the last five years from 47% up to about 53%.

So generally it's about that 54% right now.

54%?

Yes.

And when you were looking at the Chelsea portfolio, were you thinking that this portfolio would fall well within your idea of synergies with the Genesis portfolio?

We think that -- I think we have total assets up in the Northeast right now, Northeast and mid-Atlantic, that is in excess of 40% of our portfolio which is I think double the percentage of our main competitors there.

And we do think that any time we get out there with high-quality assets and assisted living or post acute for that matter, even hospitals, that we are going to try to drive a lot of synergy.

Our Board meeting last week was in Philadelphia and then New Jersey where we met with Brandywine.

Actually had our Board meeting at a Brandywine facility.

George Hager was there from Genesis and we had a very nice meeting, a great meeting with Rich Miller, who is the CEO of the Virtua system, the most profitable hospital system in New Jersey.

So we are looking to begin that process of breaking down the silos, making healthcare and senior housing more efficient.

So yes, we are going to be very, very aggressive in doing that.

We are probably still a year or two away from moving toward full ACOs and bundled payments and things like that, but we are trying to help break down those silos and get people ready for it.

Todd Stender with Wells Fargo.

Thanks.

Can you talk more about the Chelsea portfolio?

How did your source of transaction and can you talk about the mix of IL and AL?

Yes, we have known the folks at Chelsea a number of years back when I was a consultant; we worked with them when they were starting out the company.

So we have had a long history with these guys over the years.

And our origination team has known them for many years plus when I was back, and a consultant, 10 buildings in excellent markets in New Jersey and New York.

All private pay to these facilities.

A little over 900 units.

About two thirds of them in the assisted living area and another third in the memory care and IL side of the business.

So real high-quality, excellent markets, tough to replace them and like I said, we have known them a long time and finally had the opportunity to do business with them.

Are there any options to acquire existing facilities with Chelsea, anything part of that deal?

We have been reviewing additional transactions with all of our operators.

Right now, this is the majority of their portfolio.

We have talked about other assets that they either have managed or have options on and we expect to continue to grow the relationship over time.

Thanks.

And, George, in your opening remarks you highlighted the consolidation across several of the property types.

Seems like skilled nursing would be a logical place to start.

Can you comment on skilled consolidation or any other property types maybe you see for next year?

I think that any time you have sort of a shock going through any particular sector, some people are just going to hide and try to get through it.

I always think of those kind of periods as periods of opportunity.

So I think that will happen.

I think we are still waiting for a little bit more clarity as people form relationships with one another and then that can lead to more efficient pricing.

So I would be surprised if there -- if consolidations would not occur.

Thank you.

Rob Mains with Morgan Keegan.

Good morning.

Just one question kind of a corollary to Todd's there.

You talked about opportunities to add to the RIDEA portfolio that you got.

You have been holding steady at 99 facilities.

Going forward, how -- what should we be expecting there if you are going to add?

Would this be in the form of development with your partners or helping them acquire and integrate new facilities?

Just kind of a sense of where that would go.

I think most of them would be new acquisitions for now, with very selective development within their particular region of focus.

So strongly acquisition-oriented for at least the next year.

Some selective development.

And I know you can't write this in stone, but given that several of those portfolios are kind of geographically concentrated, I would assume the acquisitions would be more on the smaller scale than significant chains or am I not thinking about it the right way?

Well, I think all of the existing acquisitions have tended to get somewhat smaller.

So I think you are generally correct, but there are some opportunities right now for, yes, [$100 million to $500 million] for some and, but I guess that's stated in the old smaller given the size of our original acquisitions.

But I still think there's significant and add to some of the cost efficiencies within the region for some of our top operators.

Great, that's helpful.

Thank you.

(Operator Instructions).

Michael O'Dell, AIG Asset Management.

Good morning.

I was just hoping to revisit the discussion utilizing EBITDARM rather than EBITDAR coverage.

I understand the fee is subordinate to lease payment, but in practice have you ever actually received rent without a management fee being paid?

And also on that note, when you underwrite deals?

Are you doing so on an EBITDAR or EBITDARM basis?

We do look at both, as we all know we've provided the before and after management fees.

So we have perspective and we, obviously, we can help you understand whatever numbers you want.

So the inconsistency we found was causing a lot of confusion around the number.

There is no intent to not help you understand what an after management fee number is, so we will continue to work with you to give you whatever you need.

Would you be able to provide those EBITDAR coverage numbers?

I don't have them in front of me right now.

I'll follow-up after the call.

Thanks.

At this time there are no further questions.

I will now turn the conference back over to Mr.

Chapman for his closing remarks.

We would just in closing thank you for your participation and, again, indicate that Scott and his team will be available for follow-up questions after this call.

Thank you.

Thank you.

This concludes the conference.

You may now disconnect.