Welltower Inc (WELL) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2013 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.

Good morning everyone, and thank you for joining us today for Health Care REIT's first quarter 2013 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.

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.

George?

Thanks very much, Jeff and good morning.

Our particular focus this quarter has been on the execution of our investment, integration and infrastructure objectives.

And I think the positive results for the quarter attest to the fact that we are successfully managing our growth during this period of exceptional dynamism in the healthcare market.

First, let me comment on our investments for the quarter.

Our investment team has a well-deserved reputation for efficiently executing well-structured transactions that meet our strategic objectives.

During this quarter, that ability to execute efficiently was evidenced by the timely completion of the Sunrise transaction and the closing of additional investments with other strategic operators.

We have sourced excellent investment opportunities and have capitalized on them.

There remains a number of high quality portfolios in strong markets in which we have core strengths and where the pricing is attractive, and the growth opportunities are promising.

We will continue to deploy capital for the best facilities and with the best operators.

Accordingly, we expect strong external investment growth to be a natural complement to our drive to increase same store results.

Moreover, during the last four quarters, 84% of our investments have been made with existing relationships.

These relationship investments will continue to be the core of our investment program.

Given the size of our operating portfolio, execution by our partners and our own internal team is of paramount importance.

The quarter has been successful in this respect as well.

Internally, we have focused on people, processes and technology.

We have always had talented and experienced capital markets, accounting and property management teams.

We have strengthened our teams by selectively hiring highly-qualified individuals with critical skill sets.

These teams are at or near full strength.

For those of you who know me, I do not tolerate bureaucracy.

However, we encourage -- I encourage process improvements that allow rapid, efficient and accountable execution with the right checks and balances in place.

So whether it is SOX compliance by our operators or lease-up by our MOB management team -- and by the way, they turned in an excellent performance this quarter.

We have the processes in place that foster predictable and consistent performance.

Finally, we have aggressively improved our technology systems to handle increased demands we have placed on them.

Our proprietary asset management system was already among the best in the industry, but we have relentlessly improved all of our systems.

Our RIDEA partners have also similarly improved their infrastructure and processes.

And, they continue to do an outstanding job of providing Best-in-Class care while increasing revenue, managing expenses, and improving occupancy in their markets.

The results demonstrate our success.

This quarter, we had over $2.6 billion of gross investments, $255 million in non-core dispositions, same store NOI growth year over year of 3.5% overall, including 5.6% in our senior housing operating portfolio, and 3.2% in our medical office portfolio.

And I should note, this performance came amid continuing uncertainty on reimbursement, a slow economic recovery, and an unusually difficult flu season.

Additional details will be provided later in our call, but the key take-away is that our internal and external teams have been performing very well.

I want to conclude my remarks by reflecting more broadly on the transformation of the senior housing industry and our role in that process.

Over the past several years, it has become increasingly apparent that all healthcare REITs, as well as the operators, need to be actively involved in shaping the industry so that higher-quality care can be delivered in more cost-effective settings.

We have led the execution of this broader imperative.

Chuck Herman and his team, along with many of our RIDEA partners and our long-time operators, play an essential role in a number of industry organizations and have interacted intensively with regulators at all levels and all jurisdictions to properly and efficiently and effectively address important issues of the day.

We also work with some of the premier educational institutions in the country to assure that the next generation of managers and entrepreneurs in this sector is well-prepared.

These efforts will continue the process of educating the public, regulator and investors as to the strength and resiliency of healthcare generally and senior housing specifically.

And at this time, I will now turn the call over to Scott Brinker, who will give more detail on our portfolio performance this quarter.

And, following his remarks, Scott Estes will provide comments on our financial performance.

Scott?

Yes, thank you, George and good morning everyone.

The year's off to an excellent start for the HCN portfolio.

Our real estate is best-in-class.

We have deep relationships with the industry's leading providers.

This combination allows us to produce consistent and resilient internal and external growth, evidenced by our superior same store NOI growth and substantial follow-on investments with our existing operating partners.

Our portfolio of more than 1,100 properties continues to outperform.

Same store NOI increased 3.5% in the first quarter versus the previous year, which is quite impressive in a low growth, low inflation economy.

The portfolio, which is more than 80% private pay and trending higher, continues to deliver a unique combination of growth and stability.

Our high-quality RIDEA portfolio is managed by premier operators, including Sunrise, Belmont Village, Silverado, Benchmark, Brookdale and Merrill Gardens.

In addition to the benefits of diversification, this impressive list of operator relationships positions us for external growth, as we've completed follow-on investments with each of them.

Our RIDEA portfolio is also firmly positioned for internal growth, with a concentration in wealthy, infill locations along the East and West Coast, and in major Metro markets in between.

Housing values in our local markets are nearly 60% above the national average.

Same store NOI increased 5.6% from one year ago, quite strong given that NOI for this portfolio grew more than 10% in the comparable quarter last year.

In addition, due largely to the strong occupancy trends, there's a good chance we'll deliver a growth rate for full year 2013 in excess of our previous guidance of 5%.

Our facilities provide need-based, hospitality and healthcare services, in addition to an apartment residence.

Demand for these services is less elastic than pure real estate, a key differentiator when comparing the resiliency of senior housing to other real estate asset classes.

The rapidly-growing senior population adds even more predictability to the demand equation.

Turning to triple net senior housing, same store NOI grew 2.8% in comparison to last year, in line with our expectations and consistent with our long-term growth expectation for this portfolio, due to bundled master leases, contractual rent increasers and an average lease maturity of 13 years.

Payment coverage is stable at 1.15 times after management fees.

Triple net senior housing is the second-largest component of our overall portfolio, and is well-diversified among the sector's leading operators including Brookdale, Capital Senior Living, Emeritus, and Senior Lifestyles.

With respect to our triple net skilled nursing portfolio, same store NOI grew 3% from one year ago, and we expect similar growth going forward due to contractual rent increasers.

Genesis now accounts for 80% of our skilled nursing portfolio and the percentage is trending higher.

We have a single bundled master lease with Genesis that doesn't expire for another 16 years, plus a corporate guarantee.

Our rental payment from Genesis is well secured, as we expect 1.3 times fixed charge coverage in 2013, with improvement over time due to the Company's scale, post-acute platform, and synergies from the acquisition of Sun Healthcare.

Our portfolio of more than 200 medical office buildings is defined by its stability.

New supply in the MOB sector has grown at less than 2% in each of the past several years, which is less than the growth in demand.

Set amid these favorable supply/demand fundamentals, our MOB portfolio is particularly well situated.

With an average size of 67,000 square feet, and an average age of just 11 years, our assets were designed as outpatient healthcare centers, not simply physician office space.

The portfolio is therefore well-positioned to benefit from the relentless shift toward outpatient care.

In addition, 93% of our portfolio is affiliated with a health system, which in our experience leads to substantially higher occupancy and rental rates.

Same store NOI in this portfolio grew 3.2% in the first quarter from one year ago, slightly above our expectations due to strong leasing activity.

We self-manage the vast majority of our MOB portfolio, and our team is successfully building health system relationships in driving NOI growth.

Our hospital portfolio continues to produce well-secured, triple net rental income due to healthy 2.2 times payment coverage after management fees and bundled master leases with corporate guarantees.

Same store NOI grew 2.1% in the first quarter from one year ago, in line with our expectations.

Same store NOI in our life science portfolio grew 5.6 in comparison to last year, continuing a trend of outsized growth as rents are reset to market, which was our thesis when we made the investment three years ago.

The entire 1.2 million square foot portfolio is adjacent to the campus of MIT in Cambridge, the world's preeminent life science market.

This is incredibly valuable real estate.

Turning to new investments, we invested $2.6 billion in the first quarter, with most of the activity related to Sunrise.

We expect to complete our Sunrise acquisitions in July, at which point our investment will be $4.3 billion, with the yield exceeding 6.5% based on our NOI budget for the second half of the year, which is a remarkable return in the current market given the size, quality and growth prospects of the portfolio.

Our team's execution on the joint venture buyouts has surpassed all expectations with respect to timing and economics.

Also included in our first quarter activity was the acquisition of two senior housing communities in the Pacific Northwest that we added to our successful partnership with Brookdale.

Yet another example of our sector-leading ability to do follow-on investments with existing partners.

As to external growth, we are reviewing abundant opportunities across the continuum of care in our core markets.

We're highly selective in allocating capital to new investments, with a focus on high-quality real estate and our deep and often proprietary relationships with leading providers.

I'll now turn the call over to Scott Estes, our CFO, who will discuss our financial results.

Thanks, Scott, and good morning everyone.

Little has changed from a financial perspective during early 2013, as we've continued to execute on our business plan.

Our stock has continued to perform well, providing a 12% total return during the first quarter and a 25% total return year-to-date through yesterday's close.

Our relative debt spreads have contracted, and our outstanding debt has performed well on the heels of our recent upgrade to BBB flat from S&P.

From a financial perspective, other than closing $2.4 billion of previously-announced Sunrise investments in January, this quarter was generally focused on internal execution for the Company.

In terms of first quarter financial results, we reported normalized FFO per share of $0.91, and normalized FAD per share of $0.81, representing a 5% and 4% year over year increase, respectively.

Our results this quarter did come in slightly better than our internal expectations, primarily as a result of completing approximately $110 million of additional acquisitions beyond those in our initial forecast, and slightly lower G&A than originally anticipated.

We recently announced the 168th consecutive quarterly cash dividend for the quarter ended March 31, of $0.765 per share, or $3.06 annually, representing a 3.4% increase over the dividends paid in 2012 and a current dividend yield of 4.1%.

Next, I'll explain the few extraordinary items on the income statement this quarter.

First, we incurred $66 million of transaction costs that were primarily related to the Sunrise investments, which closed during the quarter.

We also generated $82.5 million of gains on properties sold in the quarter.

And finally, there were two smaller items, including a $2.3 million expense related to our currency hedges on our Canadian and UK investments and a $308,000 gain related to secured debt extinguished during the quarter.

In terms of capital and liquidity, as previously discussed, we increased the size of our line of credit during the first quarter through a new $2.25 billion revolver at a lower cost, and funded a $500 million term loan.

We also issued 653,000 shares under our dividend reinvestment program, generating $40 million in proceeds.

As of March 1, we have $710 million borrowed on our lines of credit.

Combining the remaining $1.55 billion of line availability with $270 million of cash and cash equivalents and additional $140 million of restricted cash in a 1031 account designated for future investments, and approximately $250 million of anticipated dispositions throughout the remainder of the year, we continue to have ample liquidity, with over $2.2 billion of total capital available through the remainder of 2013.

At the end of March, our net debt to un-depreciated book capitalization stood at 43.8%, while net debt to adjusted EBITDA was 6.3 times.

Our trailing 12 month interest and fixed charge coverage at the end of the first quarter remained solid at 3.4 times and 2.7 times, respectively.

We were pleased with the recent rating upgrade received several weeks ago from S&P to BBB flat with a stable outlook.

And Moody's recent move from BAA2 with a negative outlook back to BAA2 with a stable outlook, which brings our ratings of all three agencies to the BBB flat equivalent with a stable outlook.

We feel this was an acknowledgement of our larger, more diversified portfolio, and perhaps more importantly, an affirmation of the consistency and resiliency of the seniors housing and healthcare asset class over the past three to four years.

The immediate benefits to us come in the form of lower relative debt spreads that more closely resemble those of our peers, as well as improved overall pricing.

We anticipate that we could price a new 10 year unsecured note offering today in the 3.4% to 3.5% range in the current market.

Finally, I'll provide an update regarding our 2013 guidance and projections through the remainder of the year.

There's no change to our 2013 earnings expectations for normalized FFO in a range of $3.70 to $3.80 per diluted share, representing 5% to 8% growth, and normalized FAD in a range of $3.25 to $3.35 per diluted share, which also represents a 5% to 8% increase.

We continue to forecast 3% same store cash NOI growth for 2013, which we hope could prove to be a bit conservative in light of strong first quarter results and the continued strength of our seniors housing operating portfolio which, as Scott said, is currently projected to generate same store NOI growth slightly above 5%.

Moving now to our updated 2013 investment forecast.

Our future acquisition guidance only includes the additional $745 million of Sunrise-related closings anticipated to occur through July.

Although we don't include an assumption for additional investments beyond those already announced, we continue to see opportunities to invest with our relationship partners and will look to capitalize on attractive investment opportunities, primarily in the private pay seniors housing and MOB asset classes.

We continue to expect approximately $500 million of dispositions for the year, of which $255 million has been completed year-to-date at a blended yield on sale of 7%, including gains on sales.

Our dispositions this year will consist primarily of a combination of non-core skilled nursing and MOB assets, which should allow us to continue to drive our private pay percentage up from the current 82% toward the 85% by the end of this year.

First quarter asset sales consisted of $136 million of medical office buildings, $62 million of triple net seniors housing assets, $15 million of skilled nursing assets and $43 million of loans.

I think most importantly, these asset sales improved our overall portfolio quality, generated over $82 million in gains on sale, and provided a blended un-levered IRR of approximately 11.2% over the life of the investments.

Finally, we do project $248 million of development conversions for projects expected to convert this year at an average initial yield of 8.3%.

Our capital expenditure forecast remains $73 million for 2013, which is comprised of approximately $54 million associated with the seniors housing operating portfolio, with the remaining $19 million coming from our medical office building portfolio, both of which represent levels at or slightly below 10% of projected 2013 NOI within their respective asset categories.

Lastly, our G&A forecast for 2013 has declined slightly to approximately $112 million for the full year from the previous expectation of $115 million, due largely to changes in the timing of projected new hires and some accrual items that came in a little lower than anticipated early in the year.

At this point, we do anticipate approximately $28 million of G&A per quarter through the remaining three quarters of 2013.

Operator, that does conclude my prepared remarks.

We'd now like to open the call up for questions, please.

(Operator Instructions)

Michael Carroll, RBC Capital Markets.

Is it fair to say that the growth rate in the senior housing operating portfolio is starting to stabilize, given the 8% growth it delivered in 2012 versus the 5% growth that's expected in 2013?

The growth rates that we produced over the last few years will be difficult to replicate, 8% plus for the most part in most quarters.

That being said, it's important to keep in mind that the same store portfolio today is only 118 properties.

So it doesn't include portfolios like Sunrise, most of Belmont Village, Brookdale, Chartwell.

Our entire RIDEA portfolio is 310 assets.

So over the next 15 months, you're going to see the full benefit of some of those higher-growth portfolios.

And when we look at the entire portfolio today of 310 assets, the occupancy is still in the high 80%s, and we feel like low 90%s is a conservative estimate.

So we still feel like, over the next few years at least, given the supply/demand characteristics, that we could continue to produce NOI growth in excess of 5%.

But yes, long-term, we think 4% to 5% is a reasonable estimate for this portfolio.

Do you think the total portfolio could deliver more growth than the same store portfolio that is comprised right now?

It probably would.

It has more fill-up assets.

I don't have the number offhand, but again, I do know that the Sunrise portfolio, Chartwell and Brookdale are pretty high-growth portfolios for the next few years.

Okay.

And recently, it seems that the Company's investment focus has been mainly on senior housing assets.

Do you expect that focus to continue throughout the rest of 2013?

Yes, I think, as we indicated in this call and previous calls, we're mainly looking to senior housing and MOBs because we have some really good opportunities in both places.

And our goal is to move our private pay toward 85% and reduce somewhat our exposure to reimbursement issues.

Okay.

And then my final question relates to the skilled nursing facility coverage ratios.

I think it declined to about 1.3 times, which I believe you've indicated on previous calls that's a good number.

But do you expect much improvement over the next 12 months, particularly as some of these dispositions start be -- are reflected in the numbers?

Yes, this is Scott speaking.

There was a small decline this quarter, due largely to dispositions.

We still think that the 1.3 times after management fees is the right range.

Today, Genesis accounts for 80% of the portfolio, so that's really what you're talking about when you look at our skilled nursing portfolio.

And we do think there's upside over time.

Whether that occurs next quarter or 12 months from now, we'll see, depending upon what happens with reimbursement, but we do expect it to improve over time.

Okay.

Jack Meehan, Barclays.

Could you talk about some of the underlying drivers of the NOI growth for the RIDEA portfolio?

What -- so looking at occupancy and pricing?

And then how did the occupancy track during the quarter, and do you have any -- just a sense for where it stands in April?

Yes.

For the same store portfolio, year-over-year the occupancy was up about 300 basis points and rates were up just below 2%.

We expect, over the course of the year, that rate growth should accelerate a little bit.

Most of our operators do their rate increases on the anniversary date of the resident's move-in rather than January 1, so you don't see necessarily a huge pick-up in the first quarter.

And then in terms of quarter-over-quarter changes, occupancy was down, but just a little bit, just 20 basis points from the fourth quarter.

Mostly because of the tough flu season, but census for that portfolio is already up 110 basis points as of yesterday versus the first quarter, so they've already recaptured all of what they lost and then some.

Got you.

And then, I guess looking at some of the geographies within the portfolio, are there any markets that are performing better or worse than the average, and are there any characteristics around those?

Is it more economic, or does it look like it was more flu-related in the quarter?

At least in our portfolio, the independent living sector outperformed.

I think part of that is just because of the comparable quarters.

The assisted living sector has done extremely strong over the last two or three years, whereas independent living had done a little more challenged.

Our portfolio today is about half and half, and the independent living portion really outperformed in the most recent quarter.

Okay.

That's perfect.

Jeff Theiler, Green Street Advisors.

Obviously a lot going on this quarter, with finishing up the Sunrise transaction, or at least most of it.

Would you say that you've built up a little bit of a backlog of potential opportunities with your non-Sunrise operating partners, so that maybe next quarter we see a little bit of a rebound in that activity, or has that not really been too much of an issue?

Great question, I think, Jeff.

We have some development projects going with our existing RIDEA and other senior housing operators that will continue to build our portfolios with existing.

And we are seeing every portfolio or opportunity out there and -- but I have always said that, until we get home with some of these opportunities, we're not going to comment on them, because they're highly -- they're definitely subject to the whims and caprices of getting deals home.

But there are plenty of projects out there for us to bid on.

Okay.

Switching gears here, HCP enhanced their disclosure recently.

Yes, triple net lease fee map that breaks down some of those summary statistics into more individualized statistics per lease.

Any chance that you guys might follow suit on that in the future?

I want Scott and Scott to comment on it more specifically, but we've already developed some enhanced disclosure that we've tried out on the rating agencies, and I think you should anticipate that we'll come out with additional enhancements, perhaps next quarter.

Scott or Scott, comment?

We have been proactively looking at ways to enhance our disclosure as well, and I do think it's great for our sector to get more information out there.

As George said, I think we had a good bit of success with the agencies, and really the intent is to prove the consistency and resiliency of seniors housing and healthcare cash flows over time.

So I think the best I can say is stay tuned, and we can say we're working to be in a position to provide something somewhat similar, probably including our individual property location information as well within, I would think, the next few quarters.

That's great.

That would be greatly appreciated.

Nick Yulico, Macquarie Capital.

Scott, I was just wondering how you're thinking of the balance sheet today.

You now have net debt to EBITDA above 6 times.

And how are you thinking about that in relation to the almost $700 million of cash you need for the remaining Sunrise purchases in July?

I think we're thinking about it from a bigger picture perspective.

I think, both as I mentioned in my prepared remarks, the stock has done well, the debt has done well.

And I think, though, most importantly, I think everyone should expect the timing of any future capital raises to closely match the timing of any future investment announcements.

That's always been our goal.

So I feel comfortable with where they're at.

I think over time, those leverage numbers would come down over the next 12 months, as I think we have said.

But I think, again, I'd stick by those comments.

And that leverage number that you had in the supplemental, it's based on annualized EBITDA.

That's assuming a full quarter annualized for the recent Sunrise purchase?

Yes, it would be everything in the quarter that has happened, and Sunrise was in January, so that would capture the vast majority of everything that had closed through the first quarter on an annualized basis, yes.

Okay.

Got you.

Just one other question.

Can you break out -- you give the blended occupancy of 88.7% for the senior housing operating assets in the first quarter.

Could you break out what the occupancy is on the Sunrise assets?

Yes, it's Scott speaking.

It's in the high 80%s, around 88%, 89%, so it brought down the portfolio average by a bit.

There are a fair number of really newly-developed assets in that portfolio that should stabilize over the next 24 months or so.

Okay.

And that's, what, roughly 30%, 40% of the NOI from the overall senior housing operating is coming from Sunrise at this point?

That sounds like the right range.

Okay.

All right.

Tayo Okusanya, Jefferies.

Sorry to keep going back to the senior housing operating portfolio.

Just kind of curious, the 5.6%, the same store NOI growth this quarter, you did have a meaningful growth in operating expenses of about 5%.

Just curious what was driving that?

Yes, it's primarily related to the increase in occupancy.

In senior housing, a lot of the expenses are fixed, but I think sometimes people underestimate how important the variable expense component is.

In a down cycle like we saw three or four years ago, you saw senior housing operators able to substantially grow NOI, and for the most part maintain margins, even though occupancy was down.

That didn't happen in other real estate asset classes because most of their expenses are fixed.

In senior housing, a lot of the expenses are variable.

So as occupancy goes down, you do have the ability to reduce expense and therefore maintain NOI.

So we think that the NOI from senior housing is highly resilient and predictable.

There are up side -- there is upside as you increase occupancy to grow margin, but it's not 100% of every additional dollar that falls in the bottom line.

So I think that's what you saw.

Okay.

It wasn't like a big increase in property taxes or anything of that nature?

No.

There are specifics locations where real estate taxes are challenging, but there wasn't a specific line item that stood out.

Okay.

Let me just say, Tayo, just quickly, that margins were fairly stable.

They were up 10 basis points in the quarter on a year-over-year basis to 31.8%.

Okay.

That's helpful.

And then just going to Genesis for a quick minute, I think you mentioned you expect the fixed charge coverage ultimately to move to about 1.3 times.

Is that correct?

And if that's so, what are some of the key drivers that take it from where it is now to the 1.3 number?

It's about 1.3 now.

Okay.

We think it's going to go up over time.

It's just a matter of how long it takes to get there.

It may be a year from now, but we think 1.4, maybe even better, over the two or three year time horizon, is absolutely achievable, given their scale, geographic concentration, synergies from the Sun merger.

So we're still very positive about not just our rental income, but also our warrant in the operating company.

Okay.

That's helpful.

And then just last question for Scott.

The -- congrats on the rating upgrade.

Just curious how you expect that ultimately to lower your cost of capital and by how much, if you can make an estimate of that?

I think the final move had the specific benefit of my -- by my guesstimation, what do you think, 10 to 20 basis points, I think.

And then there's been some follow-through in just the relative market trading.

So the point is, Tayo, I think we -- our relative debt spreads much more closely match those of our peers.

I think we're within about 15 basis points.

So that's been a nice improvement.

And as I said, we could probably issue new 10 year unsecured notes in the 3.5% range today or a little bit better.

So that's clearly lower than it's been longer term.

Sounds good.

Jorel Guilloty, Morgan Stanley.

Great.

So I just have two quick questions.

One, we've been talking about EBITDA coverage ratios for the SNF portfolio, and your expectations one year out.

I was wondering if you can also touch upon the expectations for the Q mix for that portfolio one year out as well?

It's currently about 51%?

My view is the way we think about it and I think the way Genesis thinks about it, is that's actually a nice opportunity.

I think there's skill mix on a combined basis with Sonus in the low 20% range, and skilled mix is usually the way they think about it.

And I think a lot of the growth and focus that they have on driving that skilled mix is really the source of the coverage upside over the next two to three years.

So they've been adding some -- and we've been helping them grow some specific facilities, post-acute, focused, partnering with managed care organizations and health systems to reduce re-hospitalizations.

And those facilities specifically are not even licensed to accept Medicaid patients.

So again, over time we think that's a nice opportunity as they continue to roll that out and that's been a big part of their strategy.

Do you have a specific target in terms of a number for maybe this time next year, does it go to 55% Q mix or --

I would think you could translate it into a relative Q mix opportunity.

We had always said it was probably five full percentage points, but probably over the next three to five years.

Okay.

So as I roughly think about that -- I forget the exact number, so I shouldn't say, but there was an immediate cash flow benefit to the extent that each percentage point they get it up over the next few years.

Okay.

And then on to this position portfolio, the majority of what you've sold so far this year has been made up of medical office buildings.

I have two questions related to that.

One, what is the makeup of what's left in the pipeline?

And two, it seems that you've been very successful.

You've sold more than half of your guidance in the first quarter.

Why not try to re-up the guidance and dispose of any other assets that you are part of that potential pipeline?

I think we would always be proactively looking to prune our portfolio, but into discussions we've had with folks over the last few years, I think the vast majority of the significant disposition lifting has been completed, really.

I do think we would still look opportunistically, and it would be much more likely to have a situation like this quarter where, if we can sell something at a nice return, and as I noted, the yield on sale was actually 7%, so -- including the gains on sale.

So it's much -- I would call it roughly earnings neutral if you're able to get attractive prices.

And as it relates to your specific question about the mix, the disposition guidance for the $500 million overall, I would still stick by for the year.

The breakdown of that $500 million for the full year was about 50% skilled nursing, 25% medical office buildings and 25% seniors housing.

So you could almost just use that for the year and back off the numbers we completed in the first quarter, and that shows you what the remaining is.

It's a lot of -- it's some skilled nursing that's actually still remaining in the dispositions through the remainder of the year.

And you would expect the same yields you've seen to date on those?

Yes, I think so.

Just generally speaking, I don't think there's been any distinguish -- difference in pricing expectations on those versus what happened so far.

All right.

It may not have the same absolute level of gains, but again, no difference in terms of a pricing expectation.

Got it.

Stephen Mead, Anchor Capital Advisors.

On the actual Sunrise facility, what's the average age of what you acquired from Sunrise?

And compared to what's the average age of the facilities of the existing base of senior housing?

And I was just curious, in terms of -- just the cash flow requirements, in terms of maintenance and keeping the facilities up.

How are you handling those expenditures between what's capitalized and what's expensed?

This is Scott speaking.

The average age of the Sunrise portfolio is about eight years.

That compares to 12 or 13 years for the RIDEA portfolio, exclusive of Sunrise, so it brought down the average a little bit.

In terms of CapEx, one benefit of owning really high-quality buildings is that CapEx as a percentage of the NOI is low.

So for Sunrise, we spend in the neighborhood of $2,000 a unit, which is a lot and helps them maintain their premium market position.

But as a percentage of NOI, it's typically less than 10%, which we think is more than adequate capital to continue to provide really strong growth in NOI and asset value.

Are you capitalizing that or is that expensed?

We capitalize roughly $2,000 per unit for our RIDEA portfolio.

Okay.

(Operator Instructions)

Rob Mains, Stifel Nicolaus.

Scott Brinker, want to make sure I got one of the things you said right.

Occupancy on the senior housing RIDEA portfolio, you said, was down on a same store basis about -- or same store was down about 20 basis points Q4 to Q1?

That's right.

Okay.

And then did you say it was up 110 to date in the second quarter?

Yes.

If you compare occupancy as of yesterday to the occupancy average in the first quarter, it was up 110 basis points.

Okay.

And then on the SNF coverage, if the decline there was primarily due to assets that you no longer have, can we surmise then it was pretty much flat for the Genesis portfolio?

Yes.

Yes.

Okay.

And then in the consolidated RIDEA statistics, there's a RevPOR figure that you give out of 5,625 which is up a ton from where it that was the fourth quarter.

I assume that's because of the addition of Sunrise.

Given that you had Sunrise for most of the quarter, is that probably a good number to use going forward, assuming no other additions to the portfolio?

Yes, well it's substantially higher.

I think it's 40% above the national average.

Again, our portfolio is just premium quality across the board, Sunrise in particular, so they were the major reason for that big increase.

Got it.

All right.

That's all I had left.

Rich Anderson, BMO Capital Markets.

So I think -- it appears to us like the market is applying a do-no-wrong mentality towards your stock in terms of valuation.

And frankly, you guys have earned that, you and your peers, you've done a very good job, no question.

But you're charging old people maximum rents, you just said 40% above the average, and when we're talking about occupancy declines, we're mainly talking about people passing away.

So, not to make light of that at all, but there -- the fact is that this is not what one would consider typical real estate circumstances.

So my question is, with some unknowns and a lack of a long operating history, what gives you comfort that you didn't build your RIDEA portfolio right at the peak growth conditions, and that the 8% last year goes to 4% to 5% this year and then to 2% or less in further years, particularly after capturing all your occupancy upside?

I'm just curious.

That's probably not the trend that you were looking for, and how do you -- how do we know that that's not going to be the trajectory that will be coming down the path?

Rich, Chapman.

Let me make a general comment, then turn it back to Scott Brinker briefly.

One, let's keep in mind that RevPAR relates a little bit to the markets in which these facilities are, and we've purposefully gone out to invest in the top markets in the country, with the top communities as well.

So if you look at 93% of our RIDEA portfolio, 93% of it are in the top markets in the country.

Everything fits.

Household incomes, housing values, et cetera.

But in terms of your more -- your looking-forward issues, Scott, do you want to comment on that?

It's a private pay business, so people are paying for the value they're getting.

But the excess against the national average is definitely being driven by the locations as much as the quality of the services that are being provided.

Whether we invested at a - sort of the high point in the cycle, we feel it's the opposite.

We closed most of these transactions two and three years ago.

Fair enough.

Sort of at the trough of the senior housing operating performance, so occupancies have gone up in the interim period, rates have been positive, and there's still room to grow relative to historical averages.

So we feel long-term that this is actually a pretty good portfolio to own, in general, because we like senior housing, but more particularly the quality of these particular assets and operators.

Do you think, then, that you'll always be at some significant premium growth rate versus inflation?

Or what's the -- call it 15 year operating history of assisted living and independent living?

How bad can it get, and what's in your crystal ball?

Yes, it's typically been more resilient than most of the other asset classes that we have looked at.

We have done those types of comparisons over multiple years and in different points in the cycle.

And the key difference, as I noted in my remarks, with senior housing, you don't just have an apartment residence, you also have need-based hospitality and healthcare services, and you tend to get premium pricing on those.

So we actually do think that this is a sector that can provide growth in excess of what most other asset classes can deliver, and they can do it on a more resilient and consistent basis.

Okay.

And then just as a follow-up to that, how would you characterize your exposure in the event of some type of litigious activity?

Are you more exposed as in a RIDEA structure or less or equally exposed as a triple net structure?

Let me try to answer that.

We don't think that there is much additional exposure at all, from a substance standpoint, whether or not the trial bar would be more apt to bring an action because we're more involved in operations through RIDEA.

No one knows.

That hasn't happened so far.

And even if it did, we feel very, very immune from liability in any case, given what our role is and -- what our role is and what our role isn't in terms of providing the operating -- operations and providing the care.

Okay.

Thank you.

That was our last question.

This concludes today's first quarter 2013 Health Care REIT earnings conference call.

You may now disconnect.