Welltower Inc (WELL) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth 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 towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

Now I would like to turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel.

Please go ahead, sir.

Thank you.

Good morning everyone and thank you for joining us today for Health Care REIT's fourth quarter 2012 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 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 with 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, very much, Jeff.

During my more than two decades of involvement in the senior housing and healthcare industry, I cannot recall a time with greater dynamism or opportunities.

In 2012 Health Care REIT was both a beneficiary and driver of these dynamic markets.

And Scott Brinker and Scott Estes will provide you with a quantitative and qualitative summary of our quarterly and annual investments and performance, but I want to set the stage by touching on some of the most important themes.

First, our strategic plan is focused on maximizing total shareholder return by building a portfolio of high quality communities and facilities in the strongest markets, operated by the most capable operators and health systems, all as demonstrated by their clinical and operating results.

Our recently completed Sunrise acquisition was a milestone in the execution of the strategy, but there are numerous other relationships, development and acquisitions that also advanced and solidified this strategy.

Among the noteworthy investments during the fourth quarter were a major addition of $530 million to our Belmont relationship, and the $240 million expansion of our relationship with Brookdale, both through RIDEA investments.

Underpinning this strategic effort is our belief that this portfolio and network of relationships will deliver consistent and resilient returns over the long-term.

Of the $4.9 billion of investments in 2012, $3.7 billion of them came from existing relationships.

And of the $2 billion of fourth quarter investments, 94% came from our relationships.

So we really believe in these relationships, think the real estate is terrific and that our risk-adjusted return profile is very, very strong.

As Scott will cover in more detail, we think our investment thesis has been borne out during the last several years.

Second, the execution of our strategic plan has involved a thoughtful repositioning of assets.

We have purposely invested in high-quality facilities and stronger operators with less exposure to government reimbursement.

We have particularly focused on private pay senior housing assets that have proven their resiliency in tough economic times.

The measure of each new investment for us is whether it will achieve solid, growing yields and steady appreciation over our long investment horizon.

We have purposely disposed of assets that did not meet these criteria, including some relatively high-yielding, but riskier assets.

And as all real estate investors know, there are always a number of assets that do not perform as well as expected.

And we are quite aggressive in managing these non-core assets, producing large net gains while driving more internal FFO growth and maximizing long-term value.

Third, we have successfully managed the integration of our operating platform.

Practically speaking, integration means engaging in a robust budgeting process with our operators; monitoring and evaluating operations against that budget, and for that matter, industry benchmarks; capitalizing on development and acquisition opportunities with these operators; maximizing operational efficiencies; and putting in place the requisite people, systems and processes.

Before we ventured into the operating space, we believe we had the industry's most experienced and talented people and the industry's best systems.

Those were dramatically strengthened during 2011 and 2012, and the operational results attest to the success of that integration.

Our RIDEA platform -- portfolio has exceeded underwritten expectations in every quarter since our first investment in 2010.

And there are also a number of qualitative measures that underscore this success.

For example, on various occasions I have spoken about our facilitation of best practices and group purchasing by some of our RIDEA and triple-net operators, while at the same time being mindful of the necessity of competitive independence.

Fourth, our medical office billing portfolio had a strikingly successful year by any measure.

Our acquisition pipeline continues to be strong as we close $900 million of investments in 2012.

Our development starts and conversions hit the targets that we sat.

And our property management group once again demonstrated its depth and savvy by delivering industry-leading occupancy of 94.4%, maximizing revenue and carefully managing expense growth.

Finally, we do not intend to rest on our laurels.

The overall market dynamics, coupled with the implementation of the Patient Protection and Affordable Care Act, have created unique opportunities and risks.

Within that opportunity and risk set, we intend to chart a technical course based on our strategic plan.

This means that we will continue to aggressively look at opportunities both in the senior housing and healthcare sectors, continue to comprehensively evaluate domestic and international opportunities, and drive resilient, internal and external growth, both by increasing NOI in our existing buildings and working with our network of relationships to acquire and develop new facilities.

Once again, we will be both a beneficiary and a driver of markets in 2013.

And with that I will now turn the microphone over to Scott Brinker, who will give you some perspective on our investment since we last reported to you, and then in turn to Scott Estes, who will give you a more detailed summary of our financial performance and 2013 outlook.

Scott?

Yes, thank you, George, and good morning everyone.

We are seeing strong demand across the core portfolio.

Same-store NOI continues to grow at a rate that far exceeds inflation, including 4% growth in 2012, which follows 4% growth in 2011 and 3.9% growth in 2012.

Superior growth and low volatility is exactly the combination we built our portfolio to achieve.

Nearly 80% of our NOI in 2013 is expected to be from private pay sources.

Meanwhile, our government reimbursement portfolio is comprised of triple-net master leases with strong payment coverage and corporate guarantees, which results in reliable income to HCN through all reimbursement cycles.

We are now the largest owner of private pace in pay senior housing communities in the world and fundamental factors of supply and demand are favorable.

Delivery of new supply [tiers] is just 2% of the existing inventory, which is less than the growth in demand.

Modest improvement in the housing market provides further support for the operating environment.

The supply/demand fundamentals in the UK and Canada are equally attractive.

With that background, I will turn to fourth-quarter performance in our RIDEA portfolio.

Same-store NOI increased nearly 9% from one year ago driven by a 3.2% increase in rental rates and a 280 basis point increase in occupancy.

We benefit from owning Class A buildings in wealthy markets.

The median housing value surrounding our communities is nearly 70% above the national median.

As a result, our rental rates and the annual growth in rental rates far exceed industry benchmarks.

Equally important, the NOI from our RIDEA portfolio is consistent and resilient due to the diversification of more than 30,000 residents paying rent each month.

Same-store NOI growth has equaled or exceeded 7% in every quarter since our first RIDEA investment 2.5 years ago.

Though we don't expect this incredible rate of growth to continue indefinitely, we do expect the portfolio to consistently outperform the industry in both NOI growth and asset value appreciation.

Turning to our triple-net senior housing portfolio, same-store NOI grew 3% in the fourth quarter from one year ago.

We benefit from contractual rent escalators, strong payment coverage, bundled master leases with corporate guarantees and an average remaining lease term of more than 12 years.

Our largest tenants include Brookdale, Brandywine, Capital Senior Living, Emeritus and Senior Lifestyles, who are among the biggest and best operators in the sector.

Payment coverage is stable at 1.16 times after management fees.

With respect to skilled nursing, same-store NOI grew 3.3% in the fourth quarter from one year ago.

And we expect reliable growth going forward due to contractual escalators, master leases with corporate guarantees and strong payment coverage.

Genesis now accounts for 80% of our skilled nursing portfolio.

Their fixed charge coverage is approximately 1.3 times, and we expect it to improve over time as the Company capitalizes on its ancillary services platform and its increased scale from the recent acquisition of Sun Health.

Genesis is well-positioned as an efficient, low-cost provider with critical mass and geographic concentration.

They are already partnering with managed care providers to reduce re-hospitalizations, and they are receiving incentive payments for their success.

Turning to our medical office portfolio, our rental rates in occupancy exceed industry averages and our peer group, highlighting the quality and desirability of our large, outpatient centers that are affiliated with leading health systems.

These buildings are well-positioned in the evolving healthcare landscape that rewards health system sponsorship, efficiency and convenience.

Same-store NOI in our medical office portfolio grew just under 2% in the fourth quarter from one year ago.

Our hospital and life science portfolios continue to produce strong and consistent results.

Same-store NOI grew through 2.5% and 4.8% respectively in the fourth quarter versus one year ago, in line with historical results.

With respect to investment activity, we invested nearly $5 billion last year with private pay senior housing and medical office comprising virtually all of the activity.

The highlights include the initiation of relationships with Sunrise, the premier brand in the industry; Chartwell, the largest provider in Canada; and Senior Lifestyles, one of the 10 largest providers in the US.

We also expanded our existing relationships with Brookdale, the largest provider in the US, and with Belmont Village, an operator of five-star senior housing communities in major metro markets.

These investments are immediately accretive and should produce resilient and outsized growth in NOI and asset value.

We have already completed an additional $2.5 billion of acquisitions in 2013 thanks to closing the Sunrise transaction ahead of expectations and buying out several joint venture partners at favorable prices.

To date we have acquired $3.5 billion of Sunrise real estate.

And we negotiated favorable fixed-price auctions on additional Sunrise real estate that we expect to acquire by mid-2013, at which point our investment in Sunrise will be $4.3 billion with an initial yield of 6.5%.

The return is particularly attractive given the quality and growth prospects of the portfolio and is the result of sophisticated structuring around the management fees and joint venture buyouts.

We also acquired a 20% interest in the Sunrise Management Company, which should prove strategic as the sector evolves.

We spent much of the past two months with our partners at Sunrise and integration is on track.

We have integrated six RIDEA partnerships to date.

Outperformance relative to budget, coupled with follow-on investments with our partners, is evidence that integration is an area of expertise for HCN.

As to external growth, we are well-positioned due to our strong balance sheet, and most importantly, our relationship investment platform which now spans the US, Canada and the UK.

Our relationships throughout the industry are unmatched and represent a competitive advantage for external growth.

Finally, turning to dispositions, we sold more than $500 million of non-core assets last year, generating gains on sale of $100 million and unlevered IRRs averaging nearly 11%.

The dispositions were primarily skilled nursing facilities and LTACs, and we reinvested the proceeds in the core assets that match our strategy of owning a portfolio that combines superior growth with low volatility.

Our CFO Scott Estes will now discuss our financial results and 2013 guidance.

Thanks, Scott, good morning everybody.

During 2012 we generated an 18% total return for our shareholders.

And as George and Scott discussed, we are excited about our platform, relationships and growth prospects heading into 2013.

From a financial perspective, during the latter half of 2012 we raised capital through two successful equity offerings and a large unsecured note offering to preemptively fund our recent investments.

During the fourth quarter we also generated over $330 million from dispositions of nonstrategic assets.

Thus far in 2013, we have increased the size of our line of credit to renew $2.25 billion revolver at a lower cost, funded a $500 million term loan and completed an additional $2.5 billion of Sunrise-related investments.

Finally, our balance sheet remains strong and we have ample liquidity with $1.8 billion of line capacity, pro forma for the Sunrise transactions that have closed 2013 to date.

Turning now to financial results of the quarter, we reported normalized fourth quarter FFO per share of $0.85 and normalized FAD per share of $0.74.

Year-over-year growth was impacted by our decision to preemptively raise a significant amount of equity and debt capital during the third and fourth quarter, used primarily to fund the Sunrise transactions in early 2013.

We recently paid the 167th consecutive quarterly cash dividend for the quarter ended December 31 of $0.765 per share, or $3.06 annually, representing a 3.4% increase over the dividends paid in 2012.

Next, I would like to take a minute to explain several of the extraordinary items on the income statement, which are primarily related to our recent acquisition and disposition activities.

First, we incurred $19 million of transaction costs associated with our significant level of acquisitions in the fourth quarter.

We generated $54.5 million in gains on property sales in the quarter beyond the $277 million book value of assets sold.

Finally, we took $22 million of impairments associated with assets held for sale at year end, which included several non-core nursing homes, and hospital and medical office buildings expected to be sold during 2013.

In terms of fourth quarter capital activity, we successfully raise $1.2 billion of senior notes through a multi-tranche offering of five-year, 10-year and 30-year notes, which had a blended maturity in excess of 12 years and an average interest rate of 3.5%.

As a result our current blended debt maturity of nine years is well matched with our average lease maturity of 11 years.

We also issued 651,000 shares under our dividend reinvestment program, generating $38 million in proceeds.

As a result we ended 2012 with full availability on our line of credit and had over $1 billion of cash and cash equivalents.

Subsequent to quarter end we put in place a new $2.25 billion line of credit and a fully funded $500 million term loan.

After closing our new line and funding the term loan, we completed Sunrise transactions of approximately $2.5 billion, which included the assumption of about $445 million of debt after payoffs.

As a result, pro forma for the approximate $2 billion in cash required to fund these early first quarter 2013 Sunrise transactions, we had about $500 million on our new line of credit, leaving ample liquidity with approximately $1.8 billion of available credit and $500 million of projected disposition proceeds in 2013.

The significant capital raised toward the end of 2012 allowed us to pre-fund our early 2013 Sunrise related closings, while maintaining solid credit metrics.

At the end of December our debt to un-depreciated book capitalizations stood at 41.4% while debt to adjusted EBITDA was 6.1 times, both of which exclude any benefit of the $1 billion of cash on the balance sheet at that time.

Our trailing 12-month interest and fixed charge coverage at year-end remain solid at 3.3 times and 2.6 times respectively.

After completion of the early 2013 Sunrise transactions, debt to un-depreciated book cap and debt to adjusted EBITDA increased only slightly from year-end levels, while our longer-term target of 40% debt to un-depreciated book cap and net debt to EBITDA of 6 times or below remain unchanged.

Finally, I will review our 2013 guidance and assumptions.

We expect to report 2013 FFO in a range of $3.70 to $3.80 per diluted share, representing 5% to 8% growth.

Our 2013 FAD expectation is a range of $3.25 to $3.35 per diluted share, which also represents a 5% to 8% increase over normalized 2012 results.

As George and Scott mentioned, our core portfolio and largest operators are performing very well and are achieving attractive internal growth.

We are again forecasting 3% same-store cash NOI growth in 2013 which is headlined by 5% growth in our seniors housing operating portfolio, which we hope could prove conservative given the favorable current outlook for the senior housing sector.

Although we don't include an assumption for additional investments beyond those already announced, you should expect us to continue to invest with our relationship partners and look to capitalize on attractive investment opportunities.

We will develop selectively to further enhance the quality of our portfolio and believe we will complete the majority of nonstrategic asset sales by the end of 2013.

I would like to spend a minute now comparing our initial 2013 earnings guidance to the current 2013 consensus forecast.

I believe the difference between our initial guidance and the current consensus forecast boils down to three main factors.

First, consistent with past practice, we do not include any additional acquisitions in our guidance.

Second, our guidance does include the disposition of $500 million of largely nonstrategic assets this year.

And, third, our guidance reflects the $0.07 to $0.08 impact from our decision to aggressively reposition our remaining entrance fee portfolio at the end of last year.

To translate the impact of the $0.07 to $0.08 into economic terms, the 14 original entrance fee properties, which have a book value of approximately $760 million, generated a blended yield slightly over 6% in 2012.

And they are now projected to generate a blended yield of approximately 3.5% in 2013.

I would like to provide some more specific color regarding the repositioning of our entrance fee portfolio.

I think, consistent with our past comments, occupancy in the entrance fee portfolio has gradually continued to improve through mid-February to the current 76% level.

Despite the steady progress, entrance fee investments remain non-core to our investment strategy.

For that reason, during the fourth quarter we capitalized on an opportunity to convert three entrance fee communities to a rental structure by moving the lease to another operator in our portfolio who has a proven track record with rental fee TRC's.

This effectively eliminated 25% of the Company's entrance fee risk, while providing for significant potential lease increases in subsequent years as the properties fill.

Further, we converted an existing rental fee TRC to a RIDEA structure, which will allow us to directly participate in all of the upside at this specific property.

And, finally, these moves served as a catalyst to reevaluate and lower rents at eight of the remaining entrance fee communities remaining in our portfolio to provide some near-term liquidity and operational flexibility to the current operator.

We believe these recent moves put us in best position to maximize value of these non-core assets which now represent less than 1% of the total properties in our portfolio.

And, finally, regarding the timing of our repositioning efforts, we very likely could have kicked the proverbial can down the road under the existing structure for several years.

Instead we made the decision to move to a better structure now, one that minimizes our entrance fee exposure, is lower risk, and has potential for more meaningful upside over the next few years given the favorable current outlook for the seniors housing sector.

Moving now to our 2013 investment forecast, our acquisition guidance only includes the $2.5 billion of Sunrise-related closings which have occurred to date, plus the additional $745 million of Sunrise-related closings anticipated in July.

We expect approximately $500 million of dispositions at a book yield of 10%, but forecast a yield on total sales proceeds closer to 9%.

These projected dispositions consist primarily of a combination of non-core skilled nursing and MOB assets, which will allow us to drive our private pay percentage toward the 85% range toward the end of this year.

Finally, we are projecting development conversions for projects currently under construction of approximately $249 million this year at an average initial yield of 8.3%.

Regarding our 2013 the same-store cash NOI forecast, we believe that our current portfolio mix is an excellent balance of higher growth opportunities and stable long-term investments.

More specifically, we anticipate blended 5% growth out of our operating and life science portfolios that, as I previously mentioned, hope to prove to be conservative, supported by a 2% to 3% blended rent increase out of our triple-net lease portfolio and medical office buildings.

Taken together, we believe our portfolio will generate same-store cash NOI growth of approximately 3% in 2013.

Our capital expenditures forecast of $73 million for 2013 is comprised of approximately $54 million associated with the seniors housing operating portfolio, or an average of approximately $1700 per unit with the remaining $19 million from our medical office building portfolio representing approximately $1.50 per square foot.

Our G&A forecast is approximately $115 million for 2013, which includes approximately $8.5 million of accelerated in expensing of stock-based comp which will be recorded during the first quarter.

As a result, we anticipate first quarter G&A of approximately $31 million.

And, finally, as I mentioned previously, we will continue to manage the balance sheet to a debt to un-depreciated book capitalization target of approximately 40% over the long-term.

However, we don't have any specific plans to raise equity in the immediate term to meet this objective, given our significant current liquidity position.

Now with that, my prepared remarks I concluded, and I will turn it back to you, George, for some closing comments.

-- are concluded, and I will turn it back to you, George, for some closing comments.

Thanks very much, Scott.

During the past several years we have built a world-class organization and portfolio designed to deliver strong earnings growth and long-term value to our shareholders.

It is clear that healthcare delivery will continue its rapid pace of change and we believe that Health Care REIT is best positioned to capture the many opportunities presented by that change.

And we look forward to continuing success in delivering substantial value to our shareholders.

And with that, operator, we will open for questions.

(Operator Instructions).

James Milam, Sandler O'Neill.

Scott, thank you for all of the color on the balance sheet.

I guess would you mind giving us some metrics as you look out of the year?

And obviously you said, and I agree, you have a good liquidity position now.

But over the course of the year, and assuming there are some partners who want some -- that you do acquisitions with, how are you going to -- how would you like us to think about your funding, whether it is the line of credit, an unsecured offering or a potential equity offering over the course of the year?

I think there would be no veering from our traditional strategy, which would be to use the line of credit to some extent.

Part of the reason to have a larger line in place is to have a little bit higher utilization and also provide us some additional flexibility.

So I feel good about that, combined with the level of dispositions this year also being a potential source of capital for us.

But, again, I would presume that as you do your model, once you got up to billion-dollar level or so, you could put permanent capital in place.

And it is up to you to -- how you want to model getting to 40% debt to un-depreciated book over time.

But debt and equity would be on the table.

Okay, thanks.

And then, George, maybe for you, but obviously a very successful partnership with Belmont Village so far.

I guess I am curious, as these operators expand rapidly with you guys, what is their ability to successfully scale their operating platform to take on all these additional assets that they are now managing?

Well, in the case of Belmont, they were already managing, operating those facilities and we are doing very, very well with them.

But, James, I think you're asking a very good question.

One of the things that I want to do and all of our team wants to do in the next two or three years is to help put the right people, systems in place for all of these operators, so that in fact they have a scalable infrastructure.

And all of them are working very hard with us to do that.

And one of the real points of emphasis in our best practices sessions, which are held three times a year, is to talk about what we all need to do to make senior housing even stronger in the next two or three years.

Take it from really good to great, because it is already being acknowledged as a critical part of the property sector.

So I think that Patricia and her team are just doing a great job out there.

But, again, we want to have a major influence on all of our operators in trying to help them be even better.

But lots of progress is being made.

Okay, thank you, guys.

Rich Anderson, BMO Capital Markets.

So just quickly on the CapEx number that you mentioned, is it about 11,000 units, Sunrise, that you're adding?

Is that right?

That is about right.

Okay, so if you have 25,000 as of the fourth quarter and you add another 11,000, I don't see how you get to $54 million at a $1700 per unit run rate for average for the portfolio.

Can you just reconcile that for me?

$1700 times 36 is a bigger number.

Yes, maybe we will follow up with you after this call, but there may be a timing issue as well.

Not all the Sunrise assets are being acquired as of January 1.

Okay, okay, fair enough.

We have also articulated the Sunrise assets, so we are actually spending probably closer to what, Scott, $2000 per unit on -- we have talked about that -- so we can work on the math.

That would make it even more of a disconnect.

And then when I think about RIDEA and the risks associated with RIDEA, you guys continued down that path.

But what are the other risks?

Besides the just volatility in earnings, which I can acknowledge over the long-term you're going to do better RIDEA than you might doing triple-net, but what about litigation issues, state regulatory environment, those types of things?

How do you balance those types of risks when you consider what you're getting into with taking on such a large RIDEA exposure at this point?

We don't think that there is a significant additional litigation risk at all.

The person -- the company that is actually operating the facility is the manager.

And we are just given an opportunity to benefit from some of the operating results through a taxable REIT subsidiary.

I don't know, Scott Brinker, if you want to comment on that further, but we don't see -- we think the returns more than outweigh any minimal additional risk, Rich.

Okay.

Somebody doesn't like how they are treated, they are going to sue everyone, it doesn't matter if it makes sense or not.

You have to protect yourself.

I guess that is the way I would think about it.

But, anyway, we can move on.

(multiple speakers).

Then my last -- (multiple speakers)

Rich, let me just comment on it, because every now and then all of us in the healthcare REIT sector gets sued if something happens to a resident.

And usually we spend a month or two or maybe as long as a year just getting dismissed from the case.

So I wouldn't -- unduly focus on that.

Okay, fair enough.

And then last question from me is, when I was looking back at your 2012 guidance a year ago, it was $3.68 to $3.78, and you reported $3.52.

Your new guidance is $3.70 to $3.80.

I know you have that entrance fee issue, so at a minimum you reported a number much below what your guidance was.

And I understand, George, to your point, that you have a long-term focus.

But, I guess, when will the long-term be now?

How long do we have to wait for these enormous investments and associated capital raising activities to actually grow earnings?

Well, Rich, we have grown earnings.

We haven't grown earnings as much as we would have if we wouldn't have had to fund absolutely terrific investments.

I think we have been trying to lead you to the point where gradually we are going to be at a steady state, where we will do $2 billion a year from our existing operators, and, therefore, the capital raising will have less impact on the movement up of our earnings.

Okay?

But we have been very surprised and very appreciative, by the way, of the opportunity to take some of the best portfolios in senior housing off the table and put them into our camp.

It was quite a competition for Sunrise, and we have done well there.

We will continue to do well there.

But it is pretty clear to us that we are moving in the direction of a more steady state of investing.

But as long as great opportunities come up, and we can really create value for our shareholders, we'll probably take advantage of them.

There are just many fewer, Rich.

If $3.70 to $3.80 is your guidance, would you expect that to go up with investments or go down in 2013?

I would think as we would have the opportunity to add investments we would hope that they would be accretive, although, usually, if you model financing in relatively similar timing, it is marginally accretive to that level.

But I would hope they would be accretive, for sure.

Okay, thanks guys.

Appreciate it.

Jorel Guilloty, Morgan Stanley.

You have stated that on any given year, you can potentially acquire $1.5 billion to $2 billion in assets from existing relationships.

However, given your Company's current size and geographic scope, do you say that target still stands?

You are breaking up a little bit.

He was asking is the $1.5 billion to $2 billion investment pace changing giving our larger size now, as we think about investment opportunities.

Well, I think that the fact that we have added other operators, like Belmont and Sunrise and others over the last two or three years, there is a chance that in certain areas we might get more opportunities than the $1.5 billion to $2 billion.

We haven't done a lot of thinking about it, but I still think I would keep it in that range for now.

And if we were to think where we are in the cycle right now, would you say that perhaps that number is a bit low?

If you look at what you have done in the last two years, it's definitely north of that.

There is a chance it is low.

But, actually, these have -- we talk about $1.5 billion to $2 billion of investments on a steady state, more from an ongoing stream of opportunities from existing operators.

We did 94% of our investments in the fourth quarter with our existing operators.

So that is how -- what we think of as our strength.

Now whether in the next two or three years, when we have seen folks essentially take advantage of a liquidity event, whether or not that drives a higher level of growth during the next couple, three years, I think that is a possibility.

Got it.

And then following the $500 million in asset dispositions you have targeted for 2013, do you think you're largely done disposing of non-core assets?

We have certainly made a lot of progress in doing that, and we have been focusing in on smaller medical office buildings as we have talked about the need to have larger MOBs that are really medical facilities themselves with outpatient surgery centers and a really good, complimentary mix of doctors.

And we made a lot of progress there; not a whole lot more to do.

And then if you look at SNFs, already Genesis is at 80% of our SNF portfolio, so we are gradually getting our portfolio in most of these disposition categories to where we want it.

But we have been averaging, what Scott, about $200 million a year or --?

Yes.

Over the last year, obviously (multiple speakers), over $500 million.

Obviously, $500 million.

I think we will always do some, just because we don't want to spend a lot of time and incur an opportunity cost for operators who are aren't performing that well.

But I think it is definitely starting to ebb a bit.

Yes, I think that is right.

I would just add that we feel, as you said, George, very good about where the skilled nursing portfolio is.

About half of the dispositions scheduled in 2013 are skilled nursing assets.

So upon completion of that we should really have only about a $3 billion portfolio.

The Genesis represents about $2.6 billion of it.

And another handful of three or four other operators, so really 4-5 core operators, then I think we mentioned in a previous call that are all projected to cover rent in excess of 1.2 times.

And as you mentioned on the medical office building side, George, the portfolio is doing very well with aggregate occupancy of 94.4%, and now 93% of the buildings affiliated with health systems and average square footage increasing to over 60,000 square feet.

So even some of the recent MOBs dispositions have actually been fairly high occupancy buildings.

So they are much more strategic in nature.

So I think we have done really well on that front too.

Just I would note one other piece of color, I guess, every now and then, especially in the reimbursement arena, for example in the SNF area, you will find a state that gets really tough on reimbursement.

So you can never tell when that might occur.

And at that point, we would probably allow one of our SNF operators to take some of its facilities to HUD or reduce the cost, just to make it work better within our reimbursement system.

So there are always those issues that all of our asset managers have to look at when they come back to management to make a recommendation for a disposition strategy in a particular year.

All right.

Thank you very much.

Josh Raskin, Barclays.

Good morning.

Here with Jack as well.

Just first question on the RIDEA portfolio; same-store growth I think was 8.6%, obviously a strong number there.

And I apologize if I missed it, but could you talk a little about the underlying arguments in the occupancy and maybe rent increases that you're seeing in that portfolio and that growth?

Sure, this is Scott Brinker.

Last year it was 3.2% growth in rates and 280 basis point increase in census.

And for 2013 we are expecting closer to 2% to 3% increase in rate and about 2% increase in census.

Okay, and I think you said 5% would be the total, so just looking at that, it just seems like there's a little bit of wiggle room in there.

Is it fair to say it that 2013 is starting off a little more conservative?

We would hope to exceed the budget.

Like I said in the prepared remarks, for 10 quarters now of performance within our RIDEA portfolio, our growth has been above 7% in every quarter.

So, hopefully, 5% ends up being conservative.

Okay, got you.

And then I know Jack had a question on the guidance.

Thanks.

I guess just playing off that, how much of a factor is the un-stabilized portfolio for RIDEA?

It is not that big.

This is Scott Brinker again.

Our growth in the fourth quarter was just under 9%, and the growth in the stabilized portfolio was just under 8%.

So most of what you are seeing is still the stabilized portfolio.

Got you.

And then as you look out over 2013, do you see any additional opportunities to convert senior housing triple-net over to RIDEA?

No.

No, we continue to think triple-net is a great business.

We have invested over $3 billion that way over the last two years with yields over 7%.

We have got some of the best operators in the country under a triple-net structure, and we will continue to pursue investments that way as well.

Okay, thanks.

Jeff Theiler, Green Street Advisors.

Just quickly to follow up on that last guidance, it seems like you are projecting a lower rate growth next year even as your occupancy continues to climb.

I would think that as you get more stabilized occupancy, you can really push rate.

Is there something different in that portfolio?

Or are we reaching a rent ceiling, or are you just being conservative?

No, Jeff, I don't think there is a ceiling.

In these markets we increased rates at a level that was 50% of above what the industry achieved.

So we expect these communities to continue to outperform the sector.

Hopefully the guidance does end up being conservative, but there is, of course, always a little uncertainty with the state of the economy.

The good news is there is very little new supply in these markets, and the housing market is at least starting to improve generally.

Okay.

Going to your entrance fee portfolio that you repositioned, talk a little bit about who the operator is that you have transferred your assets to, why you elected to just do those three and I guess leave the other operator in place for the remaining?

And what kind of lease structure did you implement that is going to allow you to capture upside as that -- as those transferred assets continue to lease up?

Do you want to cover the operator and I will cover the numbers part?

Yes, sure.

The operator is a group called CovenantCare that we have an existing triple-net lease portfolio with of about 10 buildings.

They have been in the business for several decades and have outperformed on rental CCRCs in our experience with them.

In terms of the economics, because we are converting from an entry fee model to a rental model, you don't have the big first-generation entry fees coming in that you otherwise would have, which impacts their ability to pay rent in 2013.

Over time the NOI will be substantially higher than it would be in an entry fee model.

So the NOI growth is in the neighborhood of 20% per year on average over five years.

I think you could mention, too, that you're going to reset -- we are going to reset the rate after three years to look at the market with suitable coverages, too.

So we see substantial upside here, Jeff.

Okay, so you're -- you have a rate reset built-in after year three and that is -- okay, that makes sense.

And then, lastly, going forward just how are you thinking about development in light of this restructuring?

As you go forward obviously you're keeping at it as a much smaller percent of your overall portfolio and percentage of assets.

But what else are you thinking about in terms of how to keep from getting into this situation again?

You are saying how are we going to avoid having undue amounts of development?

Is that your question?

I guess the question is how are you thinking about the relative risks of development going forward?

Well, we always have thought that doing a certain amount of development, both in senior housing, with the demographics becoming even more compelling, makes a lot of sense for existing operators within the context of a master lease.

Okay?

And then, too, for MOBs, given the relatively small size and the fact that many of the older MOBs do not have outpatient surgery centers, et cetera, and haven't really been as well-positioned vis-a-vis complimentary services from docs, we think there is a very strong reason, rationale, for doing some development.

But except for a period back when we were the leader in assisted-living years ago, and then when the capital markets crashed and we had to finish certain development, I think we have always been within a very reasonable range of development and we are not going to go above, what, 3% or 4% were so going forward.

But there is sure a need for it, Jeff.

So we are not concerned about it, especially when we are dealing with existing operators who are already covering very well within a master lease.

I would point out, Jeff, too, our policy on not breaking ground on our medical office building developments until (multiple speakers).

Right, good point.

-- until they're at least 75% preleased and now -- the ones we have under construction currently are 89% on average preleased.

So it is clearly appropriate risk-adjusted return.

And I think we pretty consistently would say we get -- what do you guys think, 150 basis points higher returns on a relative development opportunity versus an acquisition.

Very well.

Michael Carroll, RBC Capital Markets.

With regards to your long-term revenues target how soon do you want to achieve that level?

It appears the Company has been running above this range for a little while now.

I would say it is an intermediate term goal.

Mike, we are always looking at the capital markets opportunity and balancing that with our investment opportunities.

And like I said, it is nice that we have, I think, all the tools in place.

And, fortunately, we have had access to the different components of the capital market and even including the DRIP and ACM option as well.

So the honest answer is, I would say it is over a period of years generally, but there is no immediate need.

As long as we are in a within a relative range, we will look to be opportunistic as we think about capital raises.

Then how many assets do you expect to sell a year?

Is that $500 million in the guidance for 2013 a good annual run rate?

My guess, gut, is that is a little bit higher than normal.

As reminder for everyone's benefit, we were actually projecting about $700 million of dispositions last year and we ended up, I think, at $534 million.

So, actually, there is some, call it, spillover effect of a few of those dispositions are happening in 2013.

So you're probably moving to, call it, a more normalized rate.

We will always look at some level of assets, but it should be lower other than it is always a decision to look at anything opportunistically.

But I would think lower than that as general run rate.

Okay, and then last question for me is with repositioned entrance fee portfolio, why was one community put in a RIDEA structure and not leased like the other one?

Is there something different with that one community?

It's a separate portfolio, really.

The three assets that were transitioned to rental were with one operating partner.

This other building had been converted to rental before it opened two years ago and has been operated by a third-party operator since the date it opened.

And we just made the decision that, given its current performance and future expectations, that the RIDEA structure was the right way to align incentives and capture the improvement in economics over time.

Yes, that building is actually just starting to gain some nice momentum.

If you look at it, the assisted-living, Alzheimer's and skilled nursing components are all essentially at 90%-plus full.

But they are a fairly small piece of the aggregate building, and then the independent living had been filling about seven net units per month last year.

So occupancy is actually on the cusp of having some meaningful growth, we hope.

They are at about 40% full now, so making the transition, albeit painful from just a short-term earnings guidance, we really do have some nice upside there that we should hopefully capture a lot of the 2013 earnings impact as that building fills over the next couple of years.

And I think, Scott, just to add a little color, that being able to convert certain floors of that from IL to AL will give more certainty to our fill-up as well.

So we're feeling pretty good about that.

Is that a new operator in that building too?

Did you change the operator?

No, we did not.

Okay, thanks.

Nick Yulico, Macquarie.

Turning to the Brookdale investment in the quarter, was that -- I'm assuming that was -- the 11 assets were the ones that they had purchase options on.

Is that right?

No, they had done -- this is Scott Brinker -- joint ventures with various third-party private equity companies over the years.

And Brookdale already managed these properties and had a joint venture interest in them.

And we essentially just replace the private equity company, which is a model that we have used on a number of occasions in our portfolio.

Okay, got you.

So -- and can you talk about what the cap rate was on that?

[Was at 7%].

Yes, our investments in the fourth quarter for the RIDEA portfolio were about 6.5% on average.

The Brookdale portfolio was at the high end of that.

Okay, and that 6.5% that you give there, if I remember right, that is essentially free CapEx.

And looking like forward by a year, is that the right way to think of that?

That's right.

Okay, and then just turning to Genesis, did they -- you talked a little bit about the work that they have done with the managed care outfits, but did they not participate in the bundled care program that CMS is doing?

Didn't look like they did.

I was curious what you are hearing from them on that process, and then also if you had any update on the experience you are having on the managed care side.

Yes, they didn't participate in the initial test cases for bundled payments, but they are certainly well set up to participate once it becomes more formalized.

It is still very early stages.

What they are doing, though, is participating with various managed care plans where they have a geographic concentration with the goal of reducing re-hospitalizations, which is really the key point in the bundled care anyway.

And they are already receiving economic benefits for reducing those re-hospitalizations over time.

So, is Genesis -- is that -- is there an opportunity there to do more investments with them over the next year as they are trying to capture some more of that business?

We think there is an opportunity to do that.

And we think their model is very good, and we were pleased to see Andy become the CEO.

And we think they are a great entity.

We would really welcome the opportunity to do more business with them.

Okay, sorry, were you referring to -- you were referring to Brookdale there?

Well, Genesis -- what we are doing with Genesis -- excuse me for a minute.

The Genesis deal is a different story.

What we like to do with George and Chuck and the people who have been very active in that is that we are encouraging them to refinance some of their older Medicaid facilities, and put our money into the new postacute facilities connected with or close to some of the hospitals for more of the postacute provision.

Okay, great.

Thanks, George.

Tayo Okusanya, Jefferies.

Just a couple of questions.

The same-store NOI growth forecast, the new 3% number in 2013 versus 4% in 2012, is that entirely -- that decline -- is that entirely being driven by the lower same-store assumptions for the senior housing operating portfolio?

Or does some of the CCRC restructuring also factor in that, if that is part of the same-store pool?

I think it is probably being driven by a conservative outlook.

As a reminder for everybody, we actually came out with 3% guidance in 2012 as well.

Right.

The general components, really, again with the RIDEA, again we would hope to prove conservative at 5% as we have already discussed, and the majority of the other triple-net components blend, as usual, to somewhere between 2% and 3%.

That is where we went out with a 3% overall guidance.

Okay, but the CCRC restructuring does not impact that number?

Is that part of the same-store pool or no?

No, it's not.

We are excluding that for the same-store pool because the restructurings are vastly different models than we have provided, I think, more than adequate disclosure about the entrance fee community.

Okay, perfect, that is exactly what I needed.

That is helpful.

Then let's focus just on Genesis and skilled nursing for a bit.

Coverage ratios came down a bit again this quarter.

We are probably going to end up having sequestration at the end of the week.

We saw, with part of the Tax Relief Act, additional impact to the world of therapy services.

Just kind of curious what you're hearing from George at this point in regards to managing some of that continued pressure on reimbursement rates?

This is Scott.

Fixed charge coverage remains at about 1.3 and we would expect it to stabilize at that level.

We are now a full year of the new reimbursement system.

And we actually think that coverage will start to tick up over the next 1 to 2 years.

That acquisition of Sun Health should be particularly helpful to payment coverage as they realize synergies.

That is going very well to date.

So again, we see it stabilized at 1.3 today and improving over time.

Even if you end up with a combination of this -- cut the therapy services at the beginning of the year, sequestration cut March 1 and you end up in a world where we don't get a market basket update this year, you still think that coverage is going to go up?

Yes, the 1.3 times assumes all these worst-case reimbursement scenarios.

Now if they do something on top of what they're talking about today, which we don't expect, but I guess it is possible, then we would have to revisit our expectations.

But the 1.3 improving over time does assume that sequestration happens and therapy reimbursement continues to be challenged.

Okay, that is helpful.

Then just a last question from me.

In regards to the acquisitions outlook, although nothing is built into your numbers, could you talk specifically about areas of strong interest where you would like to build a portfolio, and specifically any comments on increasing the size of the life science pool, just given how strong the Cambridge market is right now?

We have continued to look.

We have not had much luck in finding other additional investments in life sciences.

They give us the type of returns we think we need, but we are very, very pleased still with Cambridge.

Are there other property types that you have a very strong interest in building your portfolio in?

We are mainly focused on modern larger MOBs.

And if it is a development with at least 75%, 80% preleased with great systems, and especially senior housing, both triple-net and RIDEA with the best operators in the country in the best markets.

That is our focus.

That is very helpful, and I look forward to you guys raising guidance in 2013.

Rob Mains, Stifel Nicolaus.

If I could follow up on the Brookdale discussion.

The 11 assets, those were joint ventures with private equity and you bought out the private equity partner?

Is that how it worked?

That is right, Rob.

Okay, so Brookdale's role doesn't change, it is just that you are the partner now?

That's right.

Okay.

And the 5% guidance that you gave for RIDEA and life sciences, you discussed how that could be conservative.

Triple-net and medical office building, 2% to 3% -- I know it is just math to figure out what NOI growth you get on triple-net.

Could the MOB -- could you describe ways that the MOBs might be able to do better than that?

Or do you think that is probably the range that they would be in?

This is Scott Estes.

The MOB growth is probably actually a little bit below that average.

We have traditionally gone into the last few years and next year is pretty similar, at the 1% plus type range.

So we would hope to do a little bit better than that.

So it was probably going to be a little less than the 2% to 3% average as you think about it.

This is Scott.

One thing that makes it both challenging, but also in a good way there is very little rollover in our MOBs portfolio.

It is only about 20% of our leases expiring over the next 4 to 5 years.

So it is a highly stable source of income in our portfolio.

It just doesn't produce extraordinary NOI growth.

Right, I would -- yes, 94.4% occupancy, the team is about maximizing the occupancy there.

So, maybe unlike some others that has some assets that are underutilized we are trying to get -- and we are successfully getting, I think, as much as we can out of that.

And it has resulted in about 1% -plus growth over the last couple of years.

Got it.

And when we look at the entry fee assets that are being repositioned, Scott, when you described the new leases that you said 20% NOI growth over five years, that is over the course of five years?

That is not the CAGR, right?

No, that is on average, Rob.

Okay, and when you spoke of those, were those -- were you describing the three that will transition to a new operator?

Is that the three plus the eight that you're lowering the rent?

The NOI growth that I referenced is for the three properties that are transitioning to the rental model.

There is NOI growth built into the entry fee assets as well, but it is certainly not 20% per year.

Rob, maybe I will provide for you and everyone else just a little more color.

If you look at that portfolio today, and you can see in our supplement, there is about $480 million of entrance fees assets that are probably at about 5% -- 4.5% to 5% in 2013.

The three assets that were moved to a rental model are probably in the $175 million range, and the one RIDEA building is probably about $100 million facility.

So the $175 million and the $100 million components, those four buildings under the new structure basically have breakeven to slight income currently.

So, again, I think it is taking a lot of the impact now of having very good upside as those buildings fill over the next three years.

Okay, and then the remaining eight that the rents are being lowered, are those ones where are you following the pattern of the others, above average bumps at a lower rent?

It will depend on the fill progress from here.

But, yes, they would actually still have reasonably good increases to the extent the buildings fill.

There, again, I think they're probably on average about 75% occupied.

Okay, and since they are rental, so you say it depends on fill process.

Is there a participation in the fill that determines the rent?

Just the ability to reset the rates basically.

Okay, got it.

On the NOI.

Okay, that is all I had.

Thank you.

Rich Anderson, BMO Capital Markets.

Sorry for keeping it going.

Just a couple of more quick questions.

In the fourth quarter, Sunrise exercised a purchase option with NHI.

How does that play a role?

Is there any more of that, where they're a management entity or a lessee and they have purchase options?

Is there any of that in the portfolio that is not a part of the bigger 125?

No, there aren't, Rich.

We own 125 Sunrise communities.

The Sunrise Management Company, of which we are a 20% owner, is a lessee of our portfolios.

They, of course, manage the 300 assets.

I'm not aware of any third party purchase options in that leased or managed portfolio.

Okay, so check the transcript, but for NHI they sold an asset for $23 million to Sunrise in the fourth quarter, and they describe them as their tenant.

So I was just curious how that all worked into the broader scheme of things?

Just to make sure we are clear, we were certainly participating in that decision, because we now own that asset.

So there is nothing beyond that.

Okay, nothing beyond that.

That is the point.

And then, George, if I could ask a conceptual question for you, there are two camps as they think about RIDEA and the returns required to compensate for the risk.

I am curious if you have a -- if your thought process is where you think about it as a premium to a triple-net execution.

Or do you think about a return relative to a conventional multi-family transaction?

I am just wondering how you think about being compensated for risk and what math is behind it for you.

Rich, right now we tend to think of it compared to a triple-net in the senior housing area, and usually we are talking 100 to 150 basis point increase.

Unlike some of my colleagues in the healthcare REIT field, all of us really look at the operator first and try to determine if we can do either a triple-net or a RIDEA structure with a great operator in a great market and a very good facility.

Ultimately, I suppose, as we begin to get some of the credit vis-a-vis a better multiple compared to a multi-family, we will get back and talk about it later.

Okay, that is very helpful.

Thank you.

At this time there are no further questions.

Thank you for joining today's fourth quarter 2012 Health Care REIT earnings conference call.

This concludes the conference.

You may now disconnect.