Welltower Inc (WELL) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2012 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 toward 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.

Thank you, Brooke.

Good morning, everyone, and thank you for joining us today for Health Care REIT's second-quarter 2012 conference call.

If you did not receive a copy of the news release distributed this morning, you may access 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 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 will now turn the call over to George Chapman, Chairman, CEO, and President of Health Care REIT, for his opening remarks.

George?

Thanks, Jeff.

I am pleased to report another strong quarter for our Company and its shareholders.

Our relationship investment strategy is hitting on all cylinders, driving $1.1 billion of investments for the second quarter and $1.9 billion year-to-date, and the pipeline remains quite strong.

Of the $1.1 billion in new Q2 investments, over 50% of them were with existing partners.

As we look over the last three quarters, we closed over $2 billion of relationship investments that comprised approximately two-thirds of the total.

Importantly, the portfolio generated second-quarter year-over-year same-store cash NOI growth of 4.2%.

This was led by a strong 7.4% growth from our senior housing operating portfolio; and notably, every category posted at least a 3% NOI growth.

During the last five years, we have taken advantage of unprecedented opportunities to transform our portfolio into the most diversified, highest-quality, lowest-risk portfolio in the sector.

And in the second quarter, our portfolio exceeded 1,000 properties for the first time.

We have attracted the industry's finest operators and health systems, largely as a result of our reputation as a value-added partner.

Importantly, due to our relationship investment program, we have the most predictable, consistent investment pipeline in the sector.

We continue to work hard to add value to our operator partnerships.

We hold regular meetings to exchange ideas regarding best practices, and we are exploring ways in which our operators can take advantage of joint purchasing programs.

One tangible result has been the establishment of a property and casualty program that has produced an 18% average cost reduction, with improved coverages.

Our private-pay percentage is now 74% and is expected to reach 80% within 12 months.

With this private-pay percentage and the strong contribution from our RIDEA assets, we continue to believe that our portfolio is undervalued relative to other property types, particularly multifamily.

This belief is supported by a number of factors, but including a continuing cap rate compression in our sector and the strong portfolio NOI growth.

These properties, with a combination of solid NOI growth and relatively low capital expenditure requirements, have performed very well even during the toughest economic times.

On May 1 this quarter, we closed the previously announced $937 million Chartwell transaction.

Chartwell is Canada's largest senior housing operator, with high-quality assets in metropolitan areas.

This investment will be immediately accretive in markets with excellent demographic trends, and we look forward to a successful partnership and future growth in Canada and other strong markets.

Let me discuss another important transaction from the second quarter, and that is our joint venture with Legend Senior Living.

Legend and HCN entered into a $279 million joint venture.

Of the 15 facilities in the program, nine were contributed by Legend and six by HCN.

The real estate will be owned -- is owned 88% by HCN and 12% by Legend.

Operations are owned 80% by Legend and 20% by HCN.

HCN has been a -- Legend has been engaged as the independent manager.

We expect to expand the joint venture over time through opportunistic acquisitions as well as development of additional facilities in Legend's footprint.

This is particularly noteworthy for us, as we have been doing business with Tim Buchanan since 1995 when we financed as original company, Sterling House.

Sterling House is now part of Brookdale.

Tim is one of the early pioneers in our sector and is currently on the Board of Directors of ALFA.

We have supported Tim through a number of successful ventures since 1995, and we are gratified to be entering into this larger, more closely aligned relationship with Tim and his team, who have always performed at the highest level.

I'll now turn to some additional commentary on portfolio performance.

We continue to be impressed with how our skilled nursing operators are coping with the previously announced Medicare cuts.

The ability of operators to execute on mitigation efforts has been very impressive to us, and we continue to believe that postacute providers particularly will be a key part of the evolving healthcare delivery system.

The recent Genesis announcement of its agreement to purchase Sun Healthcare will produce the largest postacute platform in the United States.

The combined company has complementary platforms including rehab and hospice and should drive growth and strong results.

Approximately 75% of Sun Healthcare's is portfolio will overlap with the Genesis infrastructure, and we believe the increased scale and attendant synergies should allow Genesis to drive substantial value.

We continue to work closely with George Hager and his team to grow the short-stay, postacute component of their portfolio, resulting an accelerated quality mix improvement.

In the MOB space, we have a sector-leading occupancy of 93.6% and excellent retention rates.

With 90% of our facilities affiliated with strong health systems, our MOB portfolio is well positioned for excellent performance.

In addition to adding high-quality investments, we continue to enhance our portfolio quality through the disposition of non-core assets.

We believe our portfolio rationalization program has helped us maintain a sector-leading portfolio.

We have had success this year in disposing of $124 million of non-core assets with current guidance of $300 million for the year.

But if opportunities present themselves, we would dispose of even more non-core assets.

While we experience some dilution in disposing of certain Medicaid-focused skilled nursing facilities, we continue to believe that the improvement to our portfolio quality far outweighs any near-term costs.

Our portfolio is positioned in high-end, high barrier-to-entry markets.

38% of the portfolio is located in the Northeast and Mid-Atlantic areas.

76% of the portfolio and 90% of our RIDEA investments are located in East and West Coast markets, or the top 31 MSAs, and facilities in these markets have generally outperformed other facilities.

In addition, these concentrations have provided and will continue to provide opportunities to foster collaboration among portfolio partners across the healthcare spectrum.

As the healthcare markets have changed dramatically during the last several years, Health Care REIT has benefited from extraordinary growth as our commitment to relationships, improvement of healthcare delivery, and collaboration has appealed to operators and health systems.

We expect the evolution of healthcare to continue, given the need for professional management, better technology, and economies of scale.

Partnerships are being formed with other provider types.

They will also be formed with service providers that assist the operator to deliver an ever-improving experience to the customer.

This will drive continuing change and consolidation, resulting in larger, professionally managed, branded operators and health systems that should further strengthen our portfolio valuations.

At this point, I will ask Scott Estes, our CFO, to address certain financial and capital markets matters.

Scott?

Thanks, George.

Good morning, everybody.

As George discussed, our relationship investment program continues to generate a steady pipeline of opportunities and our portfolio continues to perform well.

Second-quarter portfolio performance was strong across the board, generating blended same-store cash NOI growth of 4.2% year-over-year, led by strong 7.4% growth out of our seniors housing operating portfolio and, as George mentioned, with every category posting at least 3% growth year-over-year.

We have continued to strengthen and diversify our portfolio and are in a strong liquidity position as we continue to execute our business plan entering the second half of 2012.

Turning to the details of the quarter, this is another solid quarter on the investment front, completing gross investments of $1.1 billion for the quarter and $1.9 billion year-to-date.

Over $600 million or over 50% of our second-quarter investments came out of existing relationships.

The majority of the remainder was our Canadian investment with Chartwell that closed on May 1 and is performing slightly ahead of underwritten expectations through May and June.

Approximately $550 million of our $1.1 billion in second-quarter investments were not included in our previous guidance and, as such, are the primary basis for the 1% increase in our normalized FFO and FAD per-share guidance today.

As George discussed, our relationship investment program is driving consistent portfolio growth, enabling us to purchase high-quality assets at attractive returns for our shareholders.

Pricing in the second quarter for both seniors housing and MOB investments averaged in the low to mid 7% range.

Looking forward, our near-term investment pipeline remains primarily concentrated in private-pay seniors housing and medical office buildings.

Current pricing on these opportunities are generally in the 6.5% to 7% range, though the highest-quality assets with higher NOI growth potential located in the best markets would trade below this range.

Finally, in terms of second-quarter dispositions, we sold $92 million of properties, which consisted primarily of a nonstrategic 12-facility skilled nursing portfolio and a six-facility seniors housing portfolio, generating total gains of $32 million.

Turning now to portfolio performance, before I begin I would note the only significant change to the supplement this quarter was the addition of the Chartwell portfolio information as part of our seniors housing operating portfolio on page 7 of the document.

This page includes two months of the Chartwell performance, as the investment closed on May 1.

In our seniors housing triple-net lease portfolio, payment covered stands at a solid 1.34 times before management fees and 1.15 times after management fees.

Occupancy of 88.2% as of March 31 remains comparable to the NIC industry average and has since increased 20 basis points to approximately 88.4% as of May 31.

More important, the stability of our seniors housing triple-net portfolio was once again demonstrated through a second-quarter increase in same-store cash NOI of 3.5%.

Our skilled nursing portfolio payment coverage currently stands at 1.94 times before management fees and 1.49 times after management fees for the trailing 12 months ended March 31.

Our overall skilled nursing occupancy increased 40 basis points sequentially to 88.3% while same-store cash NOI increased 3.3% in the second quarter versus the prior year.

Coverage declined as expected on a sequential basis, primarily due to another quarter of lower Medicare rates implemented in October of 2011 moving into the trailing 12-month data.

However, as anticipated, the recently announced positive 1.8% net increase to fiscal 2013 Medicare skilled nursing rates should help to stabilize coverages beginning later this year.

Based on our current outlook for state budgets, we are also forecasting roughly flat Medicaid rate increases in fiscal '13 across our skilled nursing portfolio, which is also in line with our previous expectations.

Essentially not a lot has changed this quarter regarding our perspective on the skilled nursing segment and our SNF portfolio assumptions.

I can report that Genesis's operating performance year-to-date is in line with budget through the first six months of the year, and that their cost-mitigation efforts continue to go well as they have about $72.5 million of $80 million potential annualized cost savings in place as of today.

Our perspective on our overall skilled nursing portfolio coverage run rate for the calendar 2012 year also remains unchanged, at about 1.7 to 1.8 times before management fees and 1.3 to 1.4 times after management fees.

At this point, to provide an update on our seniors housing operating portfolio, which is comprised of our RIDEA partnerships, our operating portfolio continues to perform well and remains ahead of budget through the second quarter of the year.

The blended 87.9% occupancy rate across our six operating portfolios for the second quarter increased 60 basis points versus the prior quarter and is up 1.6% versus last year.

In addition, same-store operating portfolio cash NOI for the second quarter increased a strong 7.4% versus the comparable quarter last year, driven by a 140 basis point increase in same-store occupancy and a 3.7% increase in revenue per occupied unit.

Through a combination of strong revenue growth and solid expense control, margins in our same-store portfolio expanded 50 basis points year-over-year.

Moving now to the medical facilities portfolio, our medical office building portfolio metrics came in slightly better than expectations during the quarter due largely to the strong leasing efforts by our property management team.

The overall occupancy here increased 20 basis points year-over-year and 50 basis points sequentially to 93.6%, while retention was 83% for the quarter and 80.3% for the trailing 12 months.

Same-store occupancy of 92.7% remains among the highest in the sector, while same-store cash NOI grew a solid 3.1% for the quarter.

I would note that we have only 277,000 square feet or just 2.3% of the portfolio expiring over the remainder of this year, and only 3.1 million square feet or 26% of the current portfolio expiring through the end of 2016.

For 2012, our current expectation is that our overall MOB portfolio occupancy will improve slightly to the 94% range and have a tenant retention rate of approximately 80%.

In regards to our hospital portfolio, cash flow payment coverage remained strong at 2.44 times before and 2.09 times after management fees.

We again experienced strong 4% same-store cash NOI growth in our hospital portfolio during the second quarter versus last year.

Our life science portfolio also performed well in the quarter, as the portfolio is 98% occupied and generated same-store cash NOI growth of 4.3%.

We do expect to continue to reap the benefits during the second half of the year from lease renewals in the life science portfolio, for approximately 20% of the overall portfolio, at renewal rates that average 60% above current rates, which commence in July and August of this year.

Turning now to financial results and guidance, we reported normalized second-quarter FFO per share of $0.89 and normalized FAD per share of $0.79, both essentially flat versus last year.

Our year-over-year growth was impacted by both dispositions of higher-yielding, nonstrategic assets over the last 12 months and the decision to prefund much of our investment activity announced year-to-date, as we continue to dramatically enhance the quality of our assets and derisk the portfolio.

Importantly, our recent success on the new investment front enabled a $0.03 increase in guidance to date, as we currently project solid 4% to 6% normalized FFO per share growth and 4% to 7% normalized FAD per share growth for the full year.

We recently declared the 165th consecutive quarterly cash dividend for the quarter ended June 30, $0.74 per share, representing a 3.5% increase over the same period last year.

In terms of capital activity, the second quarter was a fairly quiet one, after raising over $2 billion in aggregate through the beginning of April.

We did issue 565,000 shares under our dividend reinvestment program during the second quarter, generating $31 million in proceeds.

And we assumed $127 million of secured debt at an average rate slightly above 5%.

Our line of credit borrowings stood at $393 million as of June 30, or $188 million net of the $205 million in cash we had on the balance sheet.

Subsequent to quarter-end, we received an additional $249 million through funding our Canadian-dollar-denominated term loan, where we will pay interest of approximately 2.6%, and are in the process of repaying $168 million of convertible debt.

So further adjusting for these two items, our balance sheet net of cash stands at only $107 million entering the second half of 2012.

Our capital transactions year-to-date have allowed us to maintain solid credit metrics.

At the end of June, our net debt to undepreciated book capitalization stood at 43.8%.

Our trailing 12-month interest and fixed charge coverage remained solid at 3.2 times and 2.5 times, respectively, while net debt to adjusted EBITDA, as reported in our supplement, was 6.0 times.

Finally, I'll provide an update regarding our 2012 guidance and assumptions.

And as a reminder, our earnings guidance for 2012 only includes the impact of investments in capital transactions completed year to date, the ongoing funding of our existing development pipeline, and the $300 million of previously announced dispositions of primarily nonstrategic Medicaid-focused skilled nursing facilities.

As I previously mentioned, we have increased our normalized FFO and FAD per share guidance by $0.03 per share due to the incremental investments completed through June, resulting in a new 2012 normalized FFO range of $3.53 to $3.63 per diluted share and a new normalized FAD range of $3.11 to $3.21 per diluted share.

Operator, that, I believe, concludes our prepared remarks, and we would like to open the line up for questions.

(Operator Instructions) Jorel Guilloty, Morgan Stanley.

Good morning, gentlemen.

I was wondering, given that SNP coverage ratios are one quarter in arrears, would it be possible for you to give us an indication of where coverage ratios are for the SNF portfolio and where the fixed-charge ratio is for the Genesis portfolio as of, I guess, the end of the second quarter?

Hey, Jorel; it's Scott.

How are you?

I'd say to answer your first question is -- really both questions.

Not a lot of change in our coverage perspective.

The overall portfolio current run rate is about 1.7 to 1.8 times before management fees and 1.3 to 1.4 times after management fees.

And our Genesis portfolio fixed-charge coverage -- or at the Company is really in line with what we have been saying it is, and also in line with the portfolio of 1.3 to 1.4 times.

Thanks.

It also seems that you I guess expect a significant acceleration in SNF acquisitions in the near term.

Would that be a fair assessment?

I think we have been very consistent with our investments.

We have made the point that over the last 10 quarters or so we have averaged over $1 billion a quarter, and I don't think we expect that to continue forever as a lot of large portfolios have come out, have been taken down of the mix.

But we have a very strong pipeline right now and things are going quite well.

Okay.

My last question is, is there any change on your forecast for same-store NOI for any of the asset classes since the 1Q call?

Really no, Jorel.

I think that would put us in probably the mid 3% to 4% range for the full year.

Okay.

All right.

Thank you very much.

James Milam, Sandler O'Neill.

Hey, good morning, guys.

My first quick question, G&A was a little bit higher this quarter than I was expecting.

I am just curious if that is a run rate going forward, and then also if there is anything we should be looking for regarding one of the executive resignations in the quarter.

Yes, James, actually the second-quarter G&A did include a little less than $2 million of severance costs.

We actually probably could have considered backing that out for normalized purposes.

We did not; it is included in the number this quarter.

And I think a fair run rate going forward is probably $23 million to $24 million, as a result.

Okay, perfect.

Thanks.

Sure.

Then can you guys give us just a little bit more color on the MOB acquisitions?

Just in terms of where they are, who they are leased to, if they are multitenant or single tenant leases.

Then you gave some good color in terms of acquisition pricing.

But these acquisitions were a little bit higher cap rate than your MOB acquisitions last quarter, so I guess I am trying to drive at the distinction there and then what you're outlook is going forward.

Hey, James.

This is Scott.

I'd comment on that.

I think of the seven medical office building acquisitions we completed in the quarter, I know that five were multitenant buildings and two were single tenant buildings.

I think the vast majority of those came out of some existing relationships.

So I think that is a factor as you think about pricing.

(technical difficulty) I would estimate pricing in medical office buildings now are probably right around 7%, most of the deals we are looking at, with the larger pools or larger square foot buildings with more services.

Outpatient would be potentially below that.

Okay, great.

That helps.

Then just my last quick one.

Can you guys just remind me what the average rate is in the Chartwell portfolio?

Rate meaning projected NOI yields?

More of a -- like a per-unit rent.

Oh, the monthly rental rate?

Yes, exactly.

I'm just trying to compare that to the rest of the portfolio, just to get a better idea of how that stacks up.

I know it is obviously a different geography, etc.

Yes, this is Scott Brinker.

It is really two different portfolios.

In Quebec, which is about half of the portfolio, the average rate is less than CAD2,000 a month.

Closer to CAD1,500 because they are closer to senior apartments, with very little care.

Then (multiple speakers) portfolio is primarily in Ontario, and the average monthly rent there is more like CAD3,000 a month.

That's perfect.

Thanks a lot, guys.

Jeff Theiler, Green Street Advisors.

Just in terms of your investment pipeline here, you've got your relationship strategy.

Is this the pace that you're comfortable with the remainder of the year?

Do you see any reason why it could increase or decrease?

Are some of your operators finding more opportunities than expected or less opportunities?

Just a little comment on that if you would.

We would love to be able to do $1 billion a quarter, every quarter.

But these are sort of lumpy quarters where you sometimes get a $500 million package or not.

Right now there are some pretty attractive packages out there that we are looking at.

So it could theoretically exceed the average.

But we don't count on it until we close.

But we are surprised by the continuing strength of the investment pipeline.

Then just a quick detailed question.

What kind of coverages are you getting on your triple-net investments that you made this quarter?

Yes, the biggest one is Legend Senior Living, and that is in the 1.2 times range, Jeff.

And the others are around 1.1 to 1.2.

1.1 to 1.2?

Okay, great.

Thank you.

Nick Yulico, Macquarie.

Good morning.

From the first-quarter call, I believe the same-store NOI guidance for the seniors housing operating portfolio was plus 5% to 6% for the year.

So you've now been achieving above that year to date.

So what is driving the ramp down in growth for the second half of the year?

Hey, Nick, it's Scott.

I would actually say it's at the margin, anything since the previous quarter, our expectations for the operating portfolio full-year NOI growth has probably ticked up about 1%.

Everyone seems to be doing pretty well, generally running and line to a little bit ahead of budget.

So it is really just the timing.

If I had to roughly forecast the next couple quarters, it is in the 5% to 6% range.

So, I don't think there is really anything specific.

You are just looking at year-over-year comps and things of that nature as you look at the individual quarters.

Okay.

Then for the guidance, the $300 million disposition guidance, that already includes all the year-to-date activity?

Yes.

Okay.

So then as we think about the FFO guidance range for the year, is there anything else that is driving the bottom end of the range, other than -- is the range mostly sensitive to whether or not you get incremental dispositions done for the rest of the year?

Yes, it's essentially due to that and the timing of the dispositions, as well as you do add a little bit of variability, arguably, with an operating portfolio as well.

Okay.

Then just lastly, you did end the quarter -- it seems like the actual quarter activity based on the amount of investments you did, mostly funded with debt and some disposition proceeds.

How are you thinking about your leverage ratio right now as you are going into the back half of the year, assuming you do not do any more dispositions for the year?

I think we have been pretty consistent with just detailing our longer-term targets for balance sheet metrics, and I will just reiterate those.

I would say a target of closer to 40% net debt to unappreciated book; mid 3 times interest coverage; high 2 times fixed-charge coverage; and somewhere in the 5 to 6 times net debt to EBITDA area.

Okay.

Thanks, guys.

Philip Martin, Morningstar.

Good morning.

I just wanted to get a little more insight into -- how have discussions changed, if at all, with your relationships, given the increased size and breadth of your portfolio?

I mean obviously you have a front-row seat to all of the challenges these tenants and healthcare systems face, the operators, etc.

And I know, George, you had mentioned in your opening remarks the opportunities for collaboration.

Again, given your front row seat, just want to get a sense of how discussions have changed, and the types of opportunities and challenges tenants face, and where you see the opportunities.

Hey, Phil.

(inaudible) George is having a -- it's a little choppy in our room here.

He is essentially I think asking just why is the relationship strategy successful and kind of our prospects going forward.

Well, Philip, you have followed us for many, many years, and you have seen the closeness of our relationships over those years.

I think that the relationship strategy becomes even more important in a time of massive change in terms of how healthcare is delivered and also when there is consolidating -- consolidation going on within the sector.

I think everybody is realizing that information systems, technology, are extremely expensive but necessary, especially when we have ACOs coming and the need to break down the silos.

So I think that we really benefited from the fact that we are immersed in healthcare and tend to foster collaboration, which gives a lot of our operators and health systems some comfort that we can be a -- we can add value.

So that also, in a consolidation mode, we are getting perhaps more deals than we ever have for that very reason and, frankly, we expect some of our operators to over time become larger companies either through major acquisitions or through M&A.

And I think that to some degree we have a seat at the table to try to drive not only the correct consolidation, the right companies coming together, perhaps, but also in terms of putting together the infrastructure necessary for what will be a much more complex time in healthcare.

When you look at your existing portfolio, the tenants and the health systems, where are their needs the greatest in terms of infrastructure needs, obsolescence issues?

I mean where are they -- where are you seeing their needs the greatest?

You know, that's a very, very tough question.

We have seen some top-notch health systems do very well in terms of improving their information systems and technology and, for that matter, infrastructure.

But it is very, very uneven, even within the health systems.

But when you come down to senior housing, these are companies that were somewhat smaller and have grown markedly and have generally done a very good job with the information systems, adding people, looking hard at themselves, and performing.

But there is still a long way to go.

We needed to introduce more really top-notch businesspeople into this field to drive it to the performance levels that are necessary for us to really pound the table and say -- hey, they are undervalued and so are we.

And that includes all the healthcare REITs who invest in some of these companies.

So I would say, there is a need across-the-board for additional professional management and systems; but people are doing a pretty good job of getting there.

We also have thought about actually as one of our undertakings for our senior housing RIDEA and key operators in senior housing, whatever, putting together alliances that would allow for some of these improvements to information systems and technology as we drive senior housing up in the estimation of the Street.

Okay, okay.

That's helpful.

As I look -- I mean there is a real transitional phase here for healthcare, and certainly the healthcare REITS, and trying to understand the different risk/reward profiles of these individual healthcare REIT portfolios is becoming certainly more and more important.

And being able to shed some light on some of the differences in terms of the opportunities and the risk/reward profiles of your portfolio versus other healthcare REIT portfolios I think is only going to help all of us understand both the opportunities and the challenges, etc.

So, thanks for that insight and I will cede the floor.

Michael Mueller, JPMorgan.

Yes, hi.

A couple things.

First of all, George, you were talking about you may accelerate some non-core asset sales if you had the opportunity.

Just was wondering how big of a pool you consider to be non-core.

So if you could slice off X% of it, how big would that be?

Right now, it is -- as a percentage it is not very large.

We have been over the last three or four years, been selling some non-core, smaller MOBs and those that are not closely affiliated with the systems.

So we have substantially reduced any of those.

In the skilled nursing area, frankly, they are all doing quite well as I indicated in my opening remarks.

But we do believe that over time, to do that, it is probably the right thing to do to reduce the percentage of Medicaid-focused facilities, that tend to be 25 years old or even older than that.

So there could be another $200 million or $300 million I suppose of skilled nursing beyond the $300 million.

If we had an opportunity to actually dispose of those, we would look hard at that.

But I don't want to say much more than that (inaudible).

It's a pretty low number, probably $400 million, $500 million that we could still over time dispose of.

Okay.

Secondly, talking about the SNFs, could you give a little more color on the transactions, where you bought -- I think it was about $90 million of -- yes, that may have been the right number -- $90 million of the SNFs with Genesis?

Can you talk about -- the pricing I think was close to a 9 cap.

Is that where you see pricing today?

Are the terms similar to the initial batch you did?

And are these add-on facilities for Genesis?

These were buildings that were affiliated with Genesis, that they had taken over operations about a year or so prior.

These were all in the Maryland/DC area and continue to enhance their portfolio there.

So generally, these were right in their footprint and high-quality assets affiliated with the health systems.

They had been owned by a health system down there historically.

So these were real good add-ons to their portfolio.

Yes, Mike, I was just going to add to your question about the pricing.

You're right, it was 8.9% approximate initial yield; and underwritten coverages are in the roughly 1.4 to 1.5 times range.

Okay, and that 8.9% or close to 9%, do you think that's a ballpark for what the market is today overall?

Or was there something specific about this portfolio where that is the number for that portfolio?

I think that was the number for that portfolio.

Okay.

Last question, Scott, not much on the credit line right now, but where do you think the average balance is?

What is the right average balance if we are just thinking of any point in time for the credit line?

Is it in the middle of where you are today, in the $2 billion max?

We've always said the ideal probably utilization is somewhere in the -- on average, is roughly in the 30% to 35% area.

I think it is just -- yes; we have been pretty consistent with that being a rough target utilization.

Got it.

Okay, great.

Thank you.

Todd Stender, Wells Fargo.

Hi, guys.

Thanks.

Can you just share some specifics on disposition timing in the second half?

And have you closed on any so far in the third quarter?

Hey, Todd.

It's Scott.

How are you?

Probably the majority of those would be in fairly short order, call it the middle of third quarter for you guys for modeling purposes, on average.

I don't think any of them may have closed -- they have not closed yet.

So (technical difficulty) closed yet, but you could assume modeling-wise that they could close very near to now.

Okay, thanks.

Just switching gears, how do you feel about your concentration looks with Genesis?

Should they be presented more with more acquisition opportunities like Sun?

Would you add to Genesis at this point?

How does your 16% concentration feel?

We are very, very pleased with what -- how the team has performed over at Genesis.

We are very, very supportive of the M&A with Sun Healthcare.

There are some great opportunities, especially with the 75% overlap in terms of their facilities, the chance to put hospice and rehab together.

But our deal with George is that we will support him, continue to support him, and we are also going to be very proactively improving the quality mix.

So that on one hand, George can take some of our facilities perhaps to HUD to refinance them and own some of his properties and have a lower rate.

We, on the other hand, will replace those assets that would probably be somewhat more Medicaid-oriented with a standalone postacute facility, so that we will be improving our portfolio faster than even George's portfolio as a whole, but maintaining somewhere around that $2.5 billion to $3 billion level of investment with George.

Okay, thanks.

Just looking at the MOB space, could you share what the competition was like for the seven MOBs you acquired in the quarter?

Well, competition is very, very strong out there for any MOB.

So a lot of these -- a lot of the investments we make are relating to certain of our developer connections and also related to health systems that we have a relationship with, or our developer partners have a relationship with.

So you have to be out there every day, and it is sort of pricey, and MOBs continue to be a very much favored part of the healthcare investing situation.

Thanks.

Just lastly, Scott, did you give a current line of credit balance?

I wasn't sure if the figure you have was net of cash.

It would be net of cash.

The detail of the -- in the prepared remarks got us to a run rate essentially going into the second half of the year of a little over $100 million.

Okay, thank you.

Jim Sullivan, Cowen and Company.

Good morning.

I just want to follow on a few questions that you've already received; had to do with cap rates on MOBs and then the cap rate on SNFs.

As we look at the acquisition activity over the last several quarters, what was striking this quarter is that the average cap rate on the invested capital I think worked out to be about 7.7%.

Now I know the SNF cap rate was unusually high here.

But cap rates for the other three asset classes were also higher on a consecutive quarter basis.

I wonder if you could just touch on the trend generally in terms of cap rates for the different asset classes.

George, you have mentioned that competition for MOB assets remains pretty strong; a lot of parties are interested.

But the cap rates here were 100 basis points higher than Q1, 50 basis points higher than the fourth quarter.

Is there something about these assets?

Or is there, in fact -- have you seen cap rates generally tick up across the asset classes in reaction to some other factor?

No, I don't think there is any clear indication that cap rates are moving up.

Quite the contrary.

In my opening remarks, Jim, I mentioned that if anything cap rates for the highest-end senior housing assets may be compressing.

Okay?

Scott mentioned for MOBs that may be 7% cap rate.

But you're going to see some great MOBs that are lower than that.

It could be 6.25% to 6.50%.

So I don't think you should take anything away.

The specifics about the assets, we have generally continued to invest in very high-end properties; but sometimes you get a little luckier with your initial cap rates than others, and I think it was just -- no -- you shouldn't read into it any kind of trend at all.

Okay, so we have for our modeling purposes, we use an overall average of 7% for acquisitions on a full-year basis; and that is still a good number to go with?

Yes, I think so.

With our focus on high-end MOBs and senior housing, it is a good number still.

Okay.

And second question for me, I am just curious about this.

On the senior housing, the operating assets, you've had four quarters of exceptional same-property NOI growth.

I just wonder if, as you think about that going forward, when should we expect that to moderate?

On a longer-term basis, presumably this is a number that would just not be sustainable.

So should we be looking toward -- what kind of factor should we be looking toward to see that moderating?

Would it be the occupancy rate in the portfolio, or what?

Hey, Jim.

This is Scott Estes, how are you doing?

I think maybe answer your question a couple ways.

One perspective I think that is helpful for everybody is to look at the difference between -- we do get some benefit from some assets in the RIDEA portfolio that are in fill-up.

And if you look at the 7.4% quarter-over-quarter growth here in the second quarter, if you just look at the stable component of that it would have been up about 5.7%.

So you're still seeing some benefit from some assets that are in fill-up.

It is not a lot.

We have been pretty consistent with our longer-term growth expectation of 4% to 5% for a lot of these assets.

And I think in part it is due to some component of fill-up aiding that.

But the reality is I think the portfolio really had only about 90% occupancy, still has a reasonable way to go; and the fill-up assets still have a reasonable way to go.

So I would hope it could actually continue for some time.

Well, of course, many of us are used to following the apartment sector as well.

We're very familiar with those metrics and how they play out over the course of a cycle.

And we have seen occupancy rates typically reach peak levels at the 95%, 96% level.

Are you suggesting that that is also a good metric for the operating senior housing portfolio?

Is that what you aspire to?

I didn't hear that.

What is the occupancy expectation?

Probably occupancy expectation should be in the low to mid 90% upon stabilization.

And what you're also seeing in the marketplace today is some enhanced acuity.

So unlike the apartment sector, where there isn't as much ancillary income, you can provide some additional services in senior housing which also drives rate and gets you additional margin.

Yes, that is what I was looking at, Jim.

Sorry I missed the outset of the question.

But as we do compare and we think about the aggregate opportunity there, I think Chuck is exactly right.

You have at least three or four of the operators in our RIDEA portfolio have more of an AL/dementia mix.

And you think about it, the average length of stay in a lot of these buildings are really only 1.5 to two years.

And when we look at the components of our revenue per occupied unit growth, we really do get a benefit from the service and care revenue component as services are added and acuity increases within a pretty short length of stay.

So where you may get a 3% rate increase you're also adding pretty significant component of healthcare services at a higher price.

This really is a pretty different dynamic that I think is a big factor why healthcare is both more consistent and can actually generate pretty high growth.

But actually, in terms of the operating margin, it still is significantly less than, of course, multifamily, I guess because your fixed-cost number is so much higher.

But are you suggesting that there is significant operating margin expansion as you move toward that 95% theoretically full occupancy number?

I think there is.

I mean I think when you look at the number for the quarter, I think it's about 32.5%, and it's obviously a blend of IL and AL within our aggregate RIDEA portfolio.

But, guys, we have always said the more IL-focused portfolio had margins in the, what, better companies, mid-40%s.

Mid-40%s to high 40%s, and assisted-living typically ranges from 30% to 35% operating margins.

Okay.

Very good.

Thank you.

Rob Mains, Stifel Nicolaus.

Morning.

Not a whole lot left here.

Question on the Legend transaction.

Do I understand it that you have an exclusive agreement to do any kind of new development or acquisitions with Legend?

Well, we have future rights to partner with Tim to continue acquisitions and development in his key markets.

He's got scale in the Midwest as well as in Florida; he's been successful over the years, and we would expect to grow in both markets with him.

Okay.

Then the Genesis transaction, I understand it right; those were properties that were previously -- were they managed by Genesis or owned by Genesis?

They were owned by an affiliate of Genesis.

Okay, so it is just changing the lease owners -- or the real estate ownership?

Correct.

Okay.

Then when I look at your development pipeline it seems to be winding down.

Is that the right way to look at your view of the development pipeline at this point?

It is very low relative to some of our other percentages.

We want to maintain it at low levels, say 5% max, if we can.

But I think it is a little lower than normal right now.

I mean we really have to look at developing some of the state-of-the-art MOBs which are really almost medical facilities today, with outpatient surgeries and all kinds of testing etc.

You also have to think about expanding the footprint of some of our high-end senior housing folks.

So I think we will always have a certain amount of development.

I think the 5% number as pretty much the usual cap is still going to be applicable.

But boy, senior housing is changing, and as you well know, Rob, in the medical facilities area it is changing even more with the strong commitment to outpatient types of services and the need to put those services in a much more appealing environment than, say, an older, larger urban hospital.

So we are going to be in the game.

But always keeping some sort of reasonable cap on how much development we do.

Okay.

Then turning to one question, since you raised the topic of medical office buildings, you have had a nice increase in occupancy.

So have some of your peers.

And not to take anything away from the efforts of your sales team to lease unused space, but based on some of your prior comments can we also surmise that there might be a demand component that is helping drive occupancy?

Well, I mean it's clear that health systems right now are looking hard at putting up state-of-the-art MOBs, especially as they are employing more and more doctors because of some of the issues that are surrounding reimbursement and some of the issues that docs are facing too, as -- separate from the hospital.

So, I think there is.

But it is -- on the other hand I think there is so much uncertainty out there that it has been somewhat sporadic in terms of MOB development.

So I think things like the doc fix, waiting for the Supreme Court, there is uncertainty just in the space.

So we do think there is a demand component; but there is still uncertainty that is weighing against a lot of development at this point.

But that uncertainty then would weigh in favor of occupancy at existing assets?

Yes, it helps quite a bit, I think.

Okay, great.

That's what I needed.

Thank you.

Tayo Okusanya, Jefferies.

Yes, good morning.

My question has more to do along the lines of acquisitions, specifically the appetite you would have to do debt investments rather than buying assets outright; and also appetite to do more internationally, whether within Canada or maybe doing something in the UK.

Well, you are referring to an analogous kind of investment as Jay made over in the UK with Four Seasons.

Correct.

We think that is a good investment for him.

We probably are a little more reluctant to do mezz or debt investments.

But, every opportunity that one of our colleagues get, we have probably already taken a look at as well.

We would be open to it.

We wouldn't be that enthusiastic about those kind of investments.

In terms of the UK, we were there 15 years ago, and a number of us around this table spent a lot of time there.

We think we know the UK markets well.

We have a lot of friends over there still who are doing very high-end private-pay senior housing.

So would we be open to it if we had a good opportunity and had a platform that could be expanded so that it would be worth our while?

Yes, we would look at that.

That's helpful.

Thank you.

(Operator Instructions) Jana Galan, Bank of America Merrill Lynch.

Scott, I was hoping you could clarify the [3%] guidance increase.

Is that solely on acquisition activity?

Or is there some benefit from the preferred and convertible redemptions or your RIDEA investments being ahead of budget?

At the end of the day, the increase is really attributable to the increase in acquisitions beyond what we had in our previous guidance.

G&A was a little bit higher as well, and we did assume a little bit of secured debt that was also not in our previous guidance.

So the net effect is the approximate $0.03 increase.

Great, thanks.

Then looking at the 2013 lease maturities, there is about, I think, 5% of triple-net senior housing revenues expiring.

I was just curious if renewal discussions have begun and if there is any interest in potentially converting those to operating leases

Yes, there is actually a unique situation in both our 2013 and '14 maturities.

The '13 one is actually our Brandywine lease, and that was just the nature of that initial lease term; it was initially just a three-year lease.

And the 2014 is Chelsea, so we have every expectation to expand those at the time that they come up, if not before.

So that was really just a function of the initial structure that was put in place.

And there is the expectation, especially with the Brandywine lease, that we may be in a position at some point to convert that to -- an operating lease into a RIDEA structure.

Thank you.

Karin Ford, KeyBanc Capital Markets.

Hi, good morning.

Just a follow-up on Tayo's question.

George, I think you said in your comments that you would like to grow your portfolio perhaps more in Canada.

Could you just talk about how you would potentially go about that?

Would it be through the Chartwell venture?

Are you looking at any additional portfolios?

And how big could Canada get in your portfolio?

Well, of course we are looking to expand our relationship with Chartwell.

They are doing a very good job.

It is a very good relationship.

But we would look at other assets as well in Canada.

What's difficult about Canada is that it is so much like the US about 15 years ago.

There are just very few large operators.

So it is going to be very interesting to see how the Canadian market evolves.

But I would imagine that there is going to be ongoing consolidation there as well, and we are just very active and looking up there, and we will do things through Chartwell and look at other opportunities as well.

Are there any big portfolios on the market today up there?

We don't -- we're not going to comment on what may be available.

Everybody in Canada and the US is looking at a very fast-moving marketplace, and we are going to be up there and we are going to be down here looking at any kind of opportunities that may come on the market.

Okay.

My second question is just on Genesis.

Do you still expect the Sun acquisition to have a positive impact on Genesis' corporate credit?

We do.

You know, George and Mike and his team are going to have to work with Bill Mathias's folks and really put their mark on the combined whole.

So I imagine that the first six to 12 months are going to be for George to prove up the merger.

But we have every expectation with the combined platform -- again, involving hospice, rehab, and other types of activities as well as the postacute -- to be very, very favorable for George.

Thank you very much.

Philip Martin, Morningstar.

One last question.

Regarding independent and assisted living, when you look at, let's say, your operating portfolio, can you talk about some of the trends you are seeing there in terms of traffic and demand, etc.?

Just the differences there in your portfolio.

Could you -- did you say -- could you repeat that?

Was that question about traffic and demand at the operating side?

Is that correct?

Independent living versus assisted living (multiple speakers)

Yes, I'm sorry, my phone is maybe not too good here.

But just looking -- just wanting to get some idea of the traffic at assisted and independent living, the differences.

Are you seeing a pickup in either?

Again, assisted more need-driven; independent more want-driven.

Are you seeing a little more pickup, I guess, on the independent living side?

Or is that about the same?

Or just looking to trends.

Yes, I think it's generally about the same as it has been, maybe a little bit of a pickup, but nothing significant.

Okay, thank you.

At this time there are no further questions.

Mr. Chapman, are there any closing remarks?

No, we appreciate your participating in the call, and we will be available for follow-up questions all during today and tomorrow.

Thank you.

Thank you.

This concludes the conference.

You may now disconnect.