Welltower Inc (WELL) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter 2013 Health Care REIT earnings conference call.

My name is Brooke, and I will be your operator today.

(Operator Instructions)

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

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

Please go ahead, sir.

Thank you, Brooke.

Good morning, everyone, and thank you for joining us today for Health Care REIT's third-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.

We've all become accustomed to capital and real estate markets that are increasingly volatile, because of fast-moving economic developments and significant uncertainty.

At the highest level, of course, we are all familiar with the political wrangling, the Affordable Care Act rollout, Federal Reserve actions, and international events that have impacted capital markets and fostered uncertainty about interest rates, reimbursement, and healthcare delivery.

At the industry level, we have seen significant capital inflows and growing developer interest in healthcare real estate.

And as a result, cap rates have tended to remain at historically low levels, at least for the best quality assets.

At the same time, the cost of capital for REITs has remained relatively low and very competitive with other capital sources.

And against this background, there are four important messages that I want to convey to you today.

First, our investment thesis continues to prove out quarter after quarter.

Because of our strong relationships, we are able to close on gross new investments of $1.2 billion in the third quarter that are immediately accretive.

That brought our year-to-date total to $5.3 billion.

Because we are in the most dynamic markets and have partnered with outstanding operators, our same-store NOI growth this quarter was 3.7%.

Also, because we have invested predominantly in private pay assets, we have been able to minimize the drag from reimbursement cuts and uncertainty.

We have a good mix of shorter and longer-term leases, and also a good mix across geographic regions and property types.

All designed to provide excellent short-term growth, while opening the door for greater upside in an improving economy.

Second, the Health Care REIT platform, which is our unique combination of people, processes, technology, and business culture, has emerged as an industry-leading platform.

And let me point out just a few notable accomplishments this quarter that illustrate that point.

Today, we will issue our first sustainability report, which documents the work we have been doing on a number of fronts.

I encourage you to visit our website later today to review it.

Also, through the efforts of our relationship teams, we have arranged for operators to voluntarily participate in a group purchasing organization that could yield meaningful cost savings on food and other items.

This is in addition to the property insurance program that we have already instituted and have discussed on previous calls.

At the same time, our relationship teams have developed state-of-the-art benchmarking tools to help us manage our portfolio.

So in short, our progressive platform is an important reason why we can deliver consistent returns in a volatile market, and provide tangible value to our partners.

Third, we will continue to be agile and entrepreneurial in addressing market challenges.

These include the need to develop digital care plans, reduce costs, deliver care in the lowest cost settings, and implement electronic medical records.

We believe these challenges present major opportunities for us.

Through our industry affiliations and an immersion in healthcare, we are well positioned to capitalize on these opportunities.

Fourth, and very importantly, you should expect us to continue to invest in strategically important assets.

We are not sitting out this market, although we are going to be selective in our investments.

Specifically, when there are opportunities to grow in important markets or with important operators and health systems, we will seize them.

And we will not hesitate to develop where and when demand justifies it.

We take a long-term investment view.

We will always balance strong year-over-year growth with strong long-term growth in order to maximize shareholder value.

I will now turn the call over to Scott Brinker, who will discuss our investments in more detail, and to Scott Estes, who will review our financial performance.

Thank you.

Scott?

Thank you, George.

Good morning, everyone.

I'm pleased to share the highlights of another quarter of internal and external growth.

Our portfolio is generating consistent, superior results, as evidenced by 3.7% growth in same-store NOI.

We also invested $1.2 billion into Class A real estate, with an 8% initial cash yield.

Our relationships continue to generate off-market accretive external growth.

I'll start the portfolio review with senior housing, which represents 60% of our income.

We've got a good mix of short and long duration leases, which allows us to deliver an attractive combination of growth, and stability.

Performance continues to be exceptional.

Same-store NOI in the operating portfolio grew 9.4% over the prior year, well above budget, driven by a 3.6% increase in rental rates.

The short duration of the leases allows us to capture the full benefit of this growth.

Results in the US, Canada, and the UK have all been strong, and our Sunrise investment is on target to meet or exceed a 6.5% yield in the second half of the year.

Our triple net senior housing assets, which are churning out steady growth, are a perfect complement to our operating portfolio.

Same-store NOI increased 2.8% over the prior year, and we expect similar increases going forward due to contractual escalators.

We get a lot of questions about new construction, and of course we're focused on it as well.

Supply and demand in seniors housing is all about the local market, so we monitor activity in every one of our locations.

Here's what we're seeing.

58 of our nearly 700 senior housing facilities have new supply entering their market area.

35 of those 58 are either in a triple net master lease, or are a different service type than what is being built.

So any impact in HCN will be negligible.

That leaves just 23 facilities, representing only 2.6% of our income, where we'll be directly impacted by new supply.

This is just one example of why we built a diversified portfolio.

It's also why we partnered with the sector's premier operators.

They will be ready to compete with the new supply.

The growth in the senior population and the improved economy and housing market will also help absorb the new supply.

The take away is that we expect continued strong performance in our senior housing portfolio.

Moving to triple net skilled nursing, same store NOI increased 3% over the prior year, consistent with our long-term expectation.

Payment coverage after management fee is unchanged from last quarter at 1.33 times.

Our operators, in Genesis in particular, are affectively managing through a challenging environment.

Rate growth and expense control are offsetting weakness in occupancy.

I'll wrap up the portfolio review with medical office, which represents 14% of our income.

This segment is delivering steady growth.

Same-store NOI increased 1.2% over the prior year.

Our portfolio continues to have industry-leading occupancy and rental rates, a testament to its quality.

The investment marketplace.

It's active across the continuum.

Cap rates for high-quality senior housing and medical office portfolios remain in the 6% to 7% range.

We're seeing strong interest from private REITs and private equity.

The public REITs are also active.

The cost of capital is virtually identical to one year ago.

The cost of debt has increased, but so have our stock prices.

Absent material changes in the capital markets, we don't see cap rates for widely marketed deals moving higher.

But keep in mind, that public auctions are not our focus.

As an example, we invested $1.2 billion last quarter in the Class A real estate headlined by investments with Sunrise, Avery, Silverado, and Vibra.

The initial cash yield is projected to be 8%, with annual NOI growth of more than 3%.

The exceptional yield is due to favorable prices on the final round of Sunrise joint venture buyouts, and the off-market nature of the negotiations.

We also closed the $173 million acquisition of Merrill Gardens' interest in 38 senior housing communities that we subsequently leased to Emeritus under a structure that provides HCN the downside protection of a lease, with much of the upside of a RIDEA investment.

The operator transition went smoothly, and the communities are exceeding expectations to date.

Looking forward, we have active dialogue with more than 30 of our existing operating partners.

For us, they're a powerful source of accretive deal flow in the US, UK and Canada.

We round out our investment platform with new development.

We've got $400 million of projects underway, at initial yields that exceed acquisition cap rates by at least 150 basis points.

Taking a longer-term view of the marketplace, private REITs and private equity tend to have relatively short holding periods.

In fact, they were the sellers on many of our past acquisitions.

When we're out bid, we can often walk away knowing that the assets will become an acquisition candidate before long.

Hopefully, with a better spread on investment the second time around.

The same is true of new development that is being funded by developers and private equity.

We view these buildings as future acquisition candidates.

More important, healthcare real estate is a massive, yet fragmented market.

This creates enormous acquisition opportunities.

Consolidation will continue.

Over time, market forces will drive high-quality healthcare real estate to the most efficient owners, which we believe are the publicly traded REITs.

The only variable is timing.

We intend to be present but patient.

That concludes my remarks, and I'll turn the call to Scott Estes to discuss our financial results.

Thank you, Scott, and good morning, everyone.

I'm happy to report that our financial position remains strong.

Our capital structure continues to provide the consistent and resilient financial results you've come to expect from Health Care REIT.

I have three simple points that I'd like to emphasize today.

First, our recent $400 million debt offering provides incremental balance sheet flexibility and liquidity.

Second, the significant $5 billion of investments completed year-to-date is now translating into more meaningful earnings growth, both for this year and next.

And third, our confidence in future earnings growth has enabled us to announce a 4% increase in our 2014 dividend payment rate today.

I'll start with some general housekeeping items related to our balance sheet and liquidity.

I'm pleased with where the balance sheet stands today.

As of September 30, our net debt to undepreciated book capitalization was 42.2%.

Currently, our debt to adjusted EBITDA is right at the 6 times level, while our adjusted interest and fixed charge coverage improved to 3.6 times and 2.8 times respectively.

These metrics are all in line with our strategic targets.

In terms of capital and liquidity, we continued to enjoy solid access to the capital markets, and have efficiently raised capital to fund the majority of transactions announced year-to-date.

There were three significant capital events which have occurred since I last spoke to you in August.

First, we issued just over 1 million shares under our dividend reinvestment program during the third quarter, generating $62 million in proceeds.

Second, $219 million of our outstanding 3% convertible debt was redeemed or converted during the quarter, leaving $275 million outstanding.

And finally, in early October, we were able to successfully raise $400 million of long tenure unsecured debt priced to yield 4.6%.

This debt sits nicely into our maturity schedule, and speaks to the ongoing support provided by the capital markets.

Let's now look at anticipated line of credit borrowings through year-end, which will exclude the effect of any additional investments.

So starting on September 30, our balance sheet shows that we had $165 million in cash, and $848 million borrowed on our credit lines, resulting in $683 million of net line borrowings at quarter end.

After taking into account the $393 million of net proceeds from our October debt offering, these net borrowings are further reduced to $290 million.

For the remainder of the year, we expect an additional $375 million of line borrowings, as the result of, first $300 million in unsecured debt with a 6% coupon maturing in November, an additional $75 million of secured debt we intend to pay off, about $100 million of projected fourth-quarter development funding, less $100 million of anticipated fourth-quarter disposition proceeds.

So as a result, we're on track to have about $665 million of net line borrowings at year-end, providing a significant $1.6 billion of line availability net of these borrowings.

Despite the recent market instability, our incremental cost of capital remains near historically low levels, and has actually improved somewhat over the last several weeks.

The weaker economic data and the Feds potential delay in tapering asset purchases has contributed to lower interest rates and generally helped the Health Care REIT stocks.

Thus far in 2013, our equity has generally performed in line with the REIT sector, generating a solid total return of approximately 10% year-to-date.

Our incremental cost of debt also remains attractive, based on current treasury yields and spreads.

As a result, we continue to have access to attractively priced capital as we source new investments through year-end and into 2014.

Moving now to our third-quarter earnings results.

Our continued success on the investment front has translated into more significant earnings growth.

Normalized FFO increased to a record $0.97 per share for the quarter, representing a strong 7% increase versus last year.

Third-quarter normalized FAD per share of $0.86 represented an increase of 5% year-over-year.

Our FFO and FAD payout ratios for the quarter declined to 79% and 89% respectively.

Results were again driven by the combination of strong internal growth in the form of a 3.7% increase in same-store NOI, and external growth in the form of $6.7 billion of net investments completed over the last 12 months.

Finally, I'll conclude today with an update on our dividend payments, our enhanced disclosure efforts and guidance.

We declared our 170th consecutive quarterly cash dividend for the quarter, ended September 30, of $0.765 per share or $3.06 annually.

This represents a 3.4% increase over the dividends paid in 2012, and a current dividend yield of 4.7%.

As we move into 2014, our confidence in our portfolio's internal and external growth has allowed us to announce a 4% increase in our 2014 dividend payment rate.

Our Board of Directors has approved a 2014 quarterly dividend payment rate of $0.795 per share, or $3.18 annually beginning with the February 2014 dividend payment.

Importantly, we expect that our rate of earnings growth next year can exceed our rate of dividend growth, allowing us to further drive down our payout ratios.

Before turning to guidance, I'd like to point out several enhancements to our supplement this quarter, as we continue our concerted effort to enhance our disclosure.

Most notably, on page 16, we created a new page assisting NAV calculations, which provides Health Care REIT's pro rata share of both NOI and debt.

Next on pages 5 and 8, we have added sequential same-store performance data over the trailing five quarters for both the senior's housing operating and life science portfolios.

And finally on page 2, we provide new disclosure detailing our portfolio NOI concentration by asset type, and that's broken down by both country, as well as ranks by our top 20 MSAs.

Turning last to guidance, we are increasing the midpoint of our FFO and FAD per share ranges by $0.02 today, based on the strength of our investment success and earnings results year-to-date, offset only slightly by our $400 million October debt offering.

Both our new normalized 2013 FFO range of $3.74 to $3.80 per share, and FAD range of $3.29 to $3.35 per share represents 6% to 8% growth year-over-year.

We continue to expect blended same-store cash NOI growth for the full-year 2013 of 3.5%, driven by the continued strength of our seniors housing operating portfolio, which is now projected to generate very strong same-store NOI growth of approximately 7% for the year.

As is typical for us, our guidance does not include an assumption for additional investments beyond those already announced.

We do continue to expect approximately $500 million of dispositions for the year, and thus far, we've completed $407 million of dispositions at a blended yield on sale of 6.4%, including net gains on sales.

Finally, we project a total of $286 million of development conversions this year, at an average initial yield of 8.5%.

Our capital expenditure forecast remains $67 million for the year, comprised of approximately $49 million associated with the seniors housing operating portfolio, with the remaining $18 million coming from our medical facilities portfolio.

And finally, our G&A forecast for 2013 remains approximately $107 million to $108 million for the full year, which implies approximately $27 million to $28 million of G&A during the fourth quarter of 2013.

That does conclude my remarks.

But I would like to leave you today with my note of confidence that we remain on excellent financial footing as we head into 2014.

So at this point operator, we would like to open up the call up for questions please.

(Operator Instructions)

Juan [Santabria] with Bank of America.

Morning, guys.

Scott, I was just hoping you could help us think about your balance sheet and flexibility to do acquisitions going forward, and how we should think about that?

And sort of remind us again, what are you targeting from a balance sheet perspective?

Most importantly, is it the level of leverage to undepreciated assets or more sort of debt to EBITDA number?

Hey, good morning Juan.

I believe we do look at all of those.

Our general targets are 40% debt to undepreciated book capitalization, net debt to EBITDA of 6 times or below.

Interest coverage and fixed charge coverage consistent with where we're at today.

We're happy with that.

And as a reminder to everyone, we were pleased with the ratings upgrade we received in the second quarter, to BBB flat across the board.

So, we're always trying to balance the appropriate combination of debt and equity.

I believe as I detailed in my prepared remarks, we have some nice flexibility with about $1.6 billion of pro forma availability heading into year-end.

But as always, we look at the debt and equity markets, and again try to raise money when we can proactively, and do it around attractive accretive acquisitions.

Okay.

Great.

Thanks.

And could you just comment just generally on how you see the acquisitions market in terms of what you guys are thinking in terms of cap rates from here?

And just what we should be thinking for relative 2014 to 2013 in terms of any comfort you can give us on continued growth through the acquisitions?

Yes, Juan.

Good morning, this is Scott.

The acquisition marketplace is very active, and there's a lot of opportunity.

The issue for us is a couple of things.

One, is being patient, so that we're paying prices that allow us to make money day one and over time.

So, there's no question in our mind that the healthcare REITs over time will end up as much bigger companies than they are today.

But we need to be patient, and not pay prices that don't make sense.

So, that's point number one.

Point number two is, that we really differentiate ourselves on the number of investments, whether it's acquisition or development, that we're able to source through our sustained clients.

And that is a source of accretive deal flow for us that has been very meaningful over the past five years.

We now have a stable of operators, in seniors housing, the medical office space, skilled nursing, that come to us with their opportunities to grow in their existing markets, or to put up new supply where they see a need.

And I think you'll see us focus on those existing clients going forward, and selectively adding new ones to our portfolio.

Okay, great.

And just lastly, I don't know if this is maybe for George.

Is there any update to the succession planning?

And you've brought it up at your Investor Day a few months back, and what should we be thinking about in terms of timing, if you have anything to share on that front.

No, in response to a question at our Investor Day, I indicated that I was going to enter into a new three-year contract essentially.

And what happens after that will perhaps be driven more by the marketplace, and what necessary capabilities we have at that point.

Okay.

Great.

Thanks guys.

Nick Yulico with UBS.

Good morning, gentlemen.

I had a couple questions.

Turning first to the same-store senior housing operating segment.

I think you said you have 7% as your guidance for this year for the same-store there.

And I was hoping you could talk a little bit about the non-same store assets.

How they've been performing on an annualized basis this year?

Since you have about two-thirds of your total senior housing operating assets not in the same-store.

And if it's possible, it would be great to have a breakdown on same-store NOI, same-store revenue, and same-store expense trends for this non-same store pool.

This is Scott Brinker speaking.

We wait 15 months to bring assets into the same-store pool, just because we didn't own these assets 12 months ago.

So over the next six months, we'll add the Sunrise portfolio in the first quarter, the remainder of the Belmont Village assets in the first quarter, as well as Benchmark, I'm sorry, Brookdale in the first quarter.

And then in the second quarter of next year, we'll add Revera.

Overall, each of those four is performing at or ahead of expectations.

Results are strong in all three countries that we invest in.

The US, UK and Canada.

And Sunrise in particular, is on track to meet the 6.5% initial yield that we've talked about for the second half of this year.

Okay.

But as far as your 2013 results so far, how is the overall senior housing portfolio tracking?

Is it below -- is it at 7%, which is where the same-store is?

Or is it below that?

As we're thinking about how to figure out where the kind of true growth is of this segment, it would be helpful to have some more statistics for the non-same store portfolio.

Yes, we are going through our budget for 2014 right now.

So we'll have better information to share the next time we talk.

But in general, those are high-growth portfolios.

So, we're not expecting the addition of those portfolios to negatively impact the performance of the same-store pool.

Okay.

Maybe just another way to ask on this is, is what is now that you've had maybe not quite a year but you've had a decent amount of the Sunrise under your ownership, how is that portfolio been?

When you talk about 6.5% yield going forward, what was the original growth expectation for that portfolio when you underwrote it?

So that we can have a feel for in a year how much NOI has been growing there.

Yes, it was in the mid to high single digits.

So it's performing in line with our expectations.

Occupancy across the portfolio is trending in the right direction.

The rate growth continues to be substantially above any benchmarks that we can find, and expense growth is in the range of 3%.

Okay.

Great.

And then, appreciate the new part of the supplement showing all the MSA exposures by property segment.

I was hoping you could talk a little bit more about which markets concern you most for senior housing supply?

I think you said only 58 of your properties are facing supply, and I am wondering if you could just talk a little bit more about that.

Because you have almost 700 senior housing properties.

And you do have exposures to some places where there are some supply.

And then as well the -- hoping to get a little more clarity on those remaining buckets which are listed on the MSA, under the MSA segments for senior housing.

Because they account for about 50% of your NOIs, and those of your senior housing NOIs in those remaining buckets.

Yes, Nick, we tried to in the prepared remarks cut through some of the part of it that could be seen in the supplement where we show NOI by MSA.

And really focus at the community level, because ultimately, the supply and demand is very much a local business.

So we looked at the new construction in each of our 700 local market communities around the US, UK, and Canada, and evaluated new supply.

And we found that 58 of our 700 buildings do have new construction entering their primary market area.

But we were able to determine that more than half of those, 35, are either in the triple net master lease or the new supply is a different service type than we provide.

For example, independent living is the new supply while our building might provide memory care services.

And that left just 23 facilities in our entire portfolio where there's new supply entering the primary market area, and those assets represent less than 3% of our total income.

Okay, just a quick follow-up on that.

Are you saying then that when you're -- first of all when you're looking, and these are the MSA breakdowns, that if we're looking at NIC map data that it's the same MSA breakdowns.

And then, when you're looking you're saying at specific property level, are you saying that -- are you using a certain mile radius ring?

Or are you -- if there's a lot of supply going into Houston but if it is 10 miles away from your properties, is that getting excluded by you guys as not being impactful?

Or anything more on that would be helpful.

Thanks.

Yes, that's right, Nick.

So, we looked at the local market for all of our properties.

It tends to be around 3 miles given the Metro locations of each building.

So something that say in Houston was 10 or 15 miles away, we would not count that as something that is competitive.

All right.

Thanks guys.

Yes.

Emmanuel Korchman with Citi.

Hey, good morning.

Maybe Scott, if we can just stick to that supply commentary for one second longer.

In those 23 assets or markets, I guess assets, do you see the new supply impacting occupancy or rate or both?

So where do you think you take the hit if a new asset opens down the street?

In most cases it's either both or neither.

We included all 23.

The reality is, in a number of cases there's either a much different acuity level being provided.

For example, the Silverado community often receives most of its referrals from other memory care communities or a different price point.

So we could further narrow the 23 down in terms of what's truly competitive, but we've chosen to try to present just a conservative assessment of new supply in the markets.

Thanks for that.

And if we go back to your earlier comment, when you talked about your longer term view for the Company, and made a comment that a lot of the acquisition candidates was round-trip or come back out to the market.

I was a little bit caught off guard by your comment of it being a better spread than -- was that just a fact of the Company being bigger?

What else do you project that the spread get better?

And secondly, if they're assets you like and you think they're going to come back unless you think that the pricing is going to be off, why wouldn't you buy them today?

Yes, the spread that I'm referring to Manny is our cost of capital against the yields that we can invest at.

So over the past three years, there's been a pretty meaningful positive spread on investment.

And over the past year, our cost of capital is about the same and cap rates have declined.

So, the arbitrage from our cost of capital against private market cap rates is just narrower than it used to be.

So, we're being cautious about where we invest our money.

What do you see changing that in the longer-term world?

Well right now, cap rates are being depressed in large part by the private REITs who have a mandate to invest huge sums of money as quickly as they can.

So there is a source of capital in the marketplace right now that isn't always present, and at some point in the future probably won't be present.

And at that point, we would expect that spread on the investment to be more positive than it is today.

And I think you'll see us more aggressive if that's the case.

And then my last question, just can you remind us on your view of going into new markets, whether it be Asia or elsewhere, I guess you guys are comfortable with Canada and the UK at the moment, but where else might we see with HCN banners going up?

Chapman, I think that we're going to be studying, continuing to study the international markets.

We've already identified certain other markets in Europe and elsewhere that are possible.

But we're going to do a very exhaustive study on that before we commit, and before we give any more information to the street.

But, we do think that we have the opportunity to be the largest and highest quality investor in real estate around the globe.

Thank you for that guys.

Jeff Theiler with Green Street Advisors.

Hello, good morning.

Just a quick follow-up on the supply statistics you were giving.

I know you define the service area as three miles, I think you said.

What percentage of the residents in your communities come from that service area?

Yes, Jeff, it's Scott, I don't know the exact percentage.

But we picked three miles because that tends to line up pretty well with where residents actually come from for these communities.

You're clearly going to get some residents from outside of that primary market.

But just keep in mind that for the most part, our communities are located in top [31] MSAs or coastal markets, so they tend to be pretty dense populations.

So three miles to us seemed like a pretty reasonable estimate of what would represent a primary market area.

So you don't know exactly, but you would estimate somewhere over 80% or 90%, something like that?

It's probably in the two-thirds to 80% range for a typical community.

Okay.

Okay.

And then can you break out your same-store operating senior housing growth a little bit more in terms of lease-up and stabilized communities?

Yes.

Of the 122 communities in the same-store pool, 5 of them are still in lease-up, with occupancy in the low 70%s, and the stable portfolio is right around 90%.

So for the most part, when you look at the same store portfolio you are seeing the stable portfolio, there just aren't that many lease-up assets.

And last quarter the stable portfolio actually had slightly better performance than the lease-up portfolio in terms of NOI growth.

Okay.

Thanks.

And then, last on the skilled nursing portfolio.

This quarter, you had a little bit of a lower Medicare and private pay revenue mix.

I know there's some sequester effect, but it's going against what you talked about when you acquired the Genesis portfolio of a continuing improving Q-mix.

But, can you talk about where you think Genesis is on their Q-mix transition and you'd expect them to be over the next year or two?

Jeff, it's Scott again.

It's definitely a challenging environment.

Genesis is performing better than most skilled nursing providers, so our payment coverages have held up for the most part.

The sequester for sure had a negative impact, and the level of hospital admissions has had a negative impact on their Medicare mix as well.

So those are the reasons for the trends you're seeing.

We think over time it picks up, but clearly there are some challenges in the operating environment that are going to make it difficult to meet those original expectations.

One other thing Jeff, Scott Estes, I would add is the one pleasant surprise has been the rate growth in Medicaid as well as Medicare relative to their budgets.

So that I think that bodes well looking into over the next fiscal year.

I think Medicaid rates, at their facilities are actually up in excess of 3%, and Medicare is up a little bit over 1%.

So those are some other positive factors.

And they expect a similar rate growth going into next year?

Yes, that was basically for fiscal 2014.

Fiscal 2014?

Okay.

All right, great.

Thanks very much.

Jack [Meachin] with Barclays.

Thanks, good morning guys.

I wanted to start with the group purchasing organization you announced this morning.

What are those services that you're including there, and what do you think the opportunity is there either in terms of improved cash flow or coverage in the portfolio?

Chuck Herman?

Yes, this has been a voluntary program that we've implemented.

We first started with an insurance program, where we went out to the property insurance market and we were able to save pretty significant dollars as it relates to what they were able to get in the open market.

Low double-digit kind of savings, and we've increased that over time.

I'm not sure the exact percent that are involved with the program this year.

But we did increase the program over the first year's implementation.

And then the second one that we have implemented, is a group purchasing program as it relates to food, and again this is a voluntary program.

About half of our operators have gone and opted in to the program.

So we're just in the rollout phase currently.

So it remains to be seen exactly what the savings will be.

And now we're in the process of implementing a capital expenditure program, as well.

Trying to go out to the market and lever our portfolio, so that we can get the most effective group purchasing possible there.

I think what operators enjoy about our program is not only the group purchasing, but also our executive forum and the ability to improve best practices because of the sharing that we do there.

And we had a very successful best practices sharing meeting at the last month's NIC conference in Chicago.

Got you.

And then, have you looked at the rates that you're spending or that you think that you can purchase through that relative to where your operators are doing it today?

Do think low double-digit savings is possible for that as well?

We're not exactly sure at this point in time.

Certain folks have different preferences to different vendors.

So each operator has a little bit different take on whether or not they think it's going to be effective or not, but what we do, because we were able to benchmark all of our statistics, we were able to go and go out to the market and explain to them exactly what the food spend and we think get the best prices.

But each operator again, ops in or ops out as it relates to it.

But most are taking it very seriously.

Got you.

And then just switching topics, the $95 million of hospital acquisitions in the quarter, it sounded like that was with Vibra.

Are they LTACHs, and was that related to the Kindred acquisition in the quarter?

It was.

This is Scott Brinker speaking again.

We have a long relationship with Vibra.

Our business model is to identify and then provide capital to the premier providers in each segment.

And although the LTACH space is not one that we have a lot of exposure to, it's less than 2% of our NOI.

We do have an existing relationship with Vibra that's been very successful.

They've proven to be premier operators for stabilized properties as well as turnarounds.

So we were able buy five, I'll call them post-acute facilities, because they really are combination LTACHs and skilled nursing.

Good geographic overlap with Vibra's existing portfolio.

Two times payment coverage, the initial lease rate of nearly 10%.

And the best news of all, we added all five of those buildings to the Vibra master lease, which already had 15 buildings with two plus times payment coverage after management fee.

And then in addition to that, we have five standalone leases, all LTACHs, primarily hold overs from the Windrose portfolio seven or eight years ago that were in again, individual leases with near-term maturity dates.

We were able to add all of those five standalone leases into the Vibra master lease, which provides us significantly enhanced security, extended the maturity date by 11 years, and substantially increased both the base rent as well as the increaser.

So it was an acquisition that allowed us to support a long-time customer and also to make, we think a pretty strong return for our shareholders.

Got you.

And I know the strategic focus has clearly been on private pay assets.

What gave you the comfort around potential changes and LTACH reimbursements gave you enough confidence to close the deal?

Yes, the big thing is the quality of Vibra's operations.

A number of things have been talked about for changes in LTACH reimbursement, whether it's patient criteria or 25% rule looked at all of those possibilities, and we think the potential impact on Vibra is very small.

And the impact on us is completely negligible, given the strong payment coverage.

Just as an example, if they implemented the 25% rule tomorrow, and Vibra didn't make a single change to their operations.

The impact on payment coverage would be about 3 basis points, and our payment coverage is well above 2 times after management fee.

Second, is patient criteria.

And we agree that LTAC should be caring for appropriate patients.

If somebody can be cared for in a skilled nursing facility, that's where they should go.

In our case, case mix index in comparison to the national average is substantially higher.

Which means that they're already caring for the types of complex patients that CMS wants them to care for.

So these aren't -- Vibra is not treating nursing home type patients.

They are providing value to the health care system even with patient criteria we think they would perform extremely well.

Okay.

That's really helpful.

Thanks guys.

Sure.

Michael Carroll with RBC Capital Markets.

Thanks.

Scott, of the 58 properties that will likely be impacted by supply, how much will the assets be impacted?

How much supply is coming online?

Is it one, two or three projects?

Well it tends to be one new competitor for each of those 23.

I can't think of any markets off hand where there are multiple new competitors.

So how much I guess of the supply in that three-mile radius is being increased by that one asset?

It varies.

An important distinction, and it's, so I'm glad you asked the question.

Our buildings are not located in the rural markets.

When you're in a rural market and a new competitor opens, you can be doubling the amount of supply.

And there just isn't that much demand in these rural areas.

So we've strategically focused on big metro markets with dense population and a lot of affluence.

So even when there is a new competitor, it might be a 5% or 10% increase in the total supply, and there may be a temporary decline in occupancy or rental rates.

But over time, those are the types of markets that can support new supply.

And that's why we've picked them, and more importantly why we've acquired modern, purpose-built assets that we think will stand the test of time, and operated by what we think are the premier operators in the sector.

In senior housing, it's a combination of- you need good real estate and you need good operations.

And it's both.

It's not either or.

Okay.

And these projects will be done within the next 12 months or so?

Over the next two years.

It takes, yes.

So NIC tracks everything that's under construction.

And then in Canada and the UK we just with our partners have identified all of the new supply.

The typical project would take between 15 and say 18 months from start to finish, and there will be some outliers, but that would be a good average.

Okay.

And then can you give us some more color on the operating performance in the senior housing portfolio?

Was there any specific locations, regions or markets that drove the results, or was it pretty much broad-based across the portfolio?

It's pretty broad-based.

One thing that we're noticed after three years of operating investments is that it has paid off to have a diversified group of operators.

So from quarter-to-quarter, one may be a little bit better, one may be a little bit worse.

But on average, we've been able to generate extremely attractive growth in the neighborhood of 8% on average.

And it's been remarkably consistent from quarter to quarter.

Okay, great.

Thanks.

Rob Mains with Stifel Nicolaus.

Thanks, I've just got a couple of odds and ends left here.

Scott, the $67 million CapEx guidance, that implies a pretty big number in the fourth quarter.

I assume that that's seasonality as opposed to a much higher level we should look at going forward?

I think that's right, Rob.

We always see the fourth quarter as the highest quarter for the year.

Okay.

And then, I noticed that the pricing in the senior housing RIDEA portfolio went up pretty dramatically from the second quarter to third quarter.

I assume that's because of the absence of the independent living Merrill Gardens assets.

Do you have either a same-store or non-same store year-over-year rate number that you can share with us?

Rob, this is Scott Brinker.

Are you asking for the year-over-year rental rate growth?

Yes.

Yes.

It was 3.6% in the same-store pool.

Okay.

And I'd assume that again the reason why it went up from Q2 to Q3 that was because of the absence of Merrill Gardens, and the addition of the assets that came on in the quarter?

Because that's not same-store.

Yes, Rob, it was due to the elimination of Merrill Gardens.

Right.

Okay.

And then I had this small number, but I noticed that in the disposition schedule in the supplemental, you had one disposition that had no yield.

Was that some sort of a non-performing asset I assume?

Yes, Rob, this is Scott Brinker.

There's a hospital in Texas that we just chose to be conservative in how we were recognizing or not recognizing income.

And as it turns out, we were able to sell it for a small gain.

So, I guess we could have been more aggressive about recognizing income but we just year-to-date had chosen not to recognize any income on that investment.

Okay.

Thanks.

And then last question, when you talk about the same-store being predominantly stable.

The concern obviously comes up that you've been putting up some really good same-store numbers, and we wonder when that's going to regress to some sort of long-term average that might be a little bit lower than 8%, 9%.

Any commentary around that?

Well we're feeling the pressure here, Rob.

The performance has just wildly exceeded our expectations.

So we guided people to 4% to 5% annual growth in that portfolio, and it's been consistently 8% plus.

We don't think that continues forever, but we are confident that it will continue to provide growth that's well in excess of inflation, and well in excess of what we could get under the triple net lease.

So whether that's next year, or 2015, I'm not sure.

But we don't think 8% will last forever, but we are very confident that it will continue to produce growth that beats inflation and a triple net lease.

Great.

So there's no addition to the same-store bucket or anything like that that you see running that into a wall?

No, the addition is next year Revera, Sunrise, Brookdale, I think all of those are either accretive or break even to the growth rate of the portfolio.

Great.

Thanks a lot.

Sure.

Todd Stender with Wells Fargo.

Hi, thanks, just a couple quick ones.

My questions revolve around the medical office building portfolio.

I'm just trying to it a feel for the general health of the segment.

Can you talk about the change in rents, one?

And two, the length of the leases in the quarter on all renewals?

Yes, this is Scott Brinker speaking, Todd, good morning.

The renewals, the terms have been longer than what we had budgeted, six plus years without a whole lot of CapEx or tenant improvements that were necessary.

So from that perspective, the activity on renewals has exceeded our expectations.

On average for the portfolio, our maturity date is about eight years.

And an important characteristic for our portfolio is that there's very little turnover, especially for the next three years, less than 20% of our leases in total over the next three years roll over.

So we feel like this is really a steady, predictable stable base for our portfolio.

The only thing I would add too, Todd, Scott Estes, is the NOI growth projection is about 1% to 2% for the year.

And I am in agreement with everything Scott said to his point, only 5% of the portfolio is rolling specifically in 2014.

So a really low number.

And occupancy was down only slightly, 20 to 30 basis points in the quarter, but it's still I think the industry leading at 94.1%.

And the commentary on that where it was just a handful of different smaller tenants that didn't renew, reasons like retirement, and practice breakups that the guys expect the occupancy to be back up in the fourth quarter.

That's helpful.

And that attributes to the decline in the retention rate, I assume?

Yes, to a slight extent, yes.

Okay.

And then just going back to the change in rents, have you guys disclosed what the rents moved to or were they flat?

Rents for the whole portfolio this year were up about 1%, 1.5%.

So it's not a high growth sector, but again, we feel it's a nice predictable stable base.

Okay.

Thanks.

And just to stay on that theme, Scott, the 6.9% yield you got on the medical office building you purchased.

What kind of growth do you underwrite in that, and where is it located?

And can you give any the primary specs we would look at, whether it's on campus, multi-tenant, hospital affiliation, that kind of stuff.

Yes, Todd.

It's in Boynton Beach, Florida.

It is sponsored by the Bethesda Health System, one of the dominant providers in that market area.

They take the vast majority of the space.

Big building, very much focused on outpatient care, so it has all the characteristics that we look for in a medical office building.

128,000 square feet.

And the growth profile tends to be in the 2% growth per year range.

Okay.

That's helpful.

Thank you.

(Operator Instructions)

Stephen Mead with Anchor Advisors.

Hello, good morning.

Can you talk about the international portfolio from the standpoint of that the issue of contributing to growth and the kinds of returns?

And then in terms of the kinds of segments that you would look at for international investment.

Just in terms of managing risk and balancing return.

What are your thoughts on that side?

This is Scott Brinker speaking.

We entered Canada and the UK over the past 18 months, and really treat it as an extension of what we're doing in the US.

So our investments are focused on modern, purpose built, private pay senior housing assets.

In Canada, we have nearly $1.5 billion invested with the two leading providers in that country, Chartwell and Revera.

Our assets are located primarily in the top five metropolitan markets.

It's really an independent living facility portfolio.

There's not much healthcare provided, and to date, the performance has been terrific.

We've received an initial yield on that investment well above 7%, in total, between Revera and Chartwell.

So we feel like for a high-quality independent living private pay portfolio, the returns are very attractive versus what you would get in the US.

With an attractive growth profile as well that we think is accretive to say the overall 3.7% that we reported this year.

And then in the UK, we have again, over $1.5 billion invested in private pay seniors housing, primarily with Sunrise in Metro London.

These are really the cream of the crop in terms of assets.

All private pay, there is some lease-up potential as well because the assets are so new.

So again, attractive yield that we think is superior to what we could get in the US for comparable assets, and an attractive growth profile as well.

Okay.

Is the contributed growth from the international, is it at a higher growth than with the US?

Yes, these particular portfolios we think again are accretive to even the 3.7% same-store growth that we reported this quarter.

Well, I was just looking at the 9.4% on the senior housing operating line.

Well they're a major component of that.

Chartwell in particular.

So they are growing in line with that rate.

Okay.

Okay.

And then just in terms of that segment and the sensitivity to the economy, wealth creation, it's independent -- it's basically housing.

It's independent housing at a very high level.

And I was wondering what the Canadian and the UK competitive position was in terms of new supply, and also what you're seeing in the case of new supply in the US, just in that segment in the senior housing?

Yes, this is Scott again.

The new supply in Canada and the UK is not as well defined as it is in the US.

The NIC database has been I think helpful for everybody to track new supply in the US, and that was the basis of our analysis.

But we did look at Canada and the UK as part of the initial underwriting, and then on a quarterly basis, from an asset management standpoint to assess new supply.

And we included both the UK and Canada in the numbers that I provided in the prepared remarks.

And what about the ability of the market to absorb the rent increases or to pay those kinds of rents from a wealth and a segment standpoint?

Yes, I think that's the real question.

So we've been purposeful in acquiring the top-quality buildings in markets that are at least relative to other areas of those countries, affluent and densely populated.

So we're doing our best to pick markets and buildings that will stand up better than the others.

But clearly, at some level senior housing is impacted by what's happening in the economy.

So, we can't predict that, we're just doing the best we can to be well-positioned to outperform.

All right.

Thanks.

Sure.

Tayo Okusanya with Jefferies.

Hello, good morning.

Just along that same line of questioning, just given your major exposure now to the UK as well as Canada.

Are there any other developed markets that you see out there that have those characteristics that you would be interested in?

You're talking internationally?

Yes.

We have studied a few others, but we're not prepared at this point to indicate a certain direction, Tayo.

But are there others out there that seem attractive?

When you just take a look at the overall landscape without mentioning any particular markets?

Well I think that we thought that the UK and Canada were very attractive for a lot of reasons, including similar cultures and backgrounds.

So at this point, we're not prepared to suggest other markets.

But we do think over time, that there is some common themes that are arising all over the globe, and that would be that in fact there is a movement in many countries toward a private pay and for getting the government out of certain activities given the costs and the burdens on government.

But at this point, we're not prepared to talk about any individual countries.

Okay.

That's fair enough.

Thank you.

Thank you.

That was our final question.

Thank you for joining.

This concludes the conference.

You may now disconnect.