Welltower Inc (WELL) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2014 Health Care REIT earnings conference call.

(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, Holly.

Good morning, everyone, and thank you for joining us today for HCN's second-quarter 2014 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.

Before we begin, let me remind you that 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 the Company 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 of 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 Tom DeRosa, our CEO.

Tom?

Thank you, Jeff, and good morning, everyone.

We've been talking to you for some time about the unique and powerful position that HCN has built in the healthcare real estate space.

We believe that our strategy of partnering with the best in class seniors housing and post-acute operators, as well as strong regional health systems, will deliver the best sustainable growth to our shareholders.

I'm quite pleased to tell you that this quarter, once again, we can back up those words with results.

Overall, our operating portfolio generated 7.7% same-store NOI growth, and the entire HCN portfolio had same-store NOI growth of 4.4%.

Now, you don't get this kind of growth from passive asset management, low cap rate asset aggregating, and solely relying on fixed increasers.

You get these results from being a value-added partner in the healthcare delivery equation.

Through our partners, we generated nearly $600 million in new investments in the quarter, and as you will hear from Scott Estes, record high FFO and FAD per share, that is tracking above Street estimates.

And you can't deliver the kind of internal growth numbers that we announced this quarter, without owning the best real estate.

When I say partnering with the best operators, it should be a given that our real estate is in the best markets.

Scott Brinker will elaborate on that.

It's not such a surprise that the best real estate in the best markets will enable you to charge the best rent.

Layer on that the best quality services and the cost savings and other operating efficiencies that HCN delivers, and you've built a powerful machine to deliver superior internal growth.

I'm particularly proud of the operating and performance-enhancing initiatives that Chuck Herman and his team spearhead with our operators.

HCN's executive forum brings together the leadership teams of the top seniors housing and post-acute operators to share in best practices and explore areas where this group can work together to drive down operating costs.

For example, our group food and furniture purchasing, as well as group insurance purchasing, is translating to real cost savings.

These savings are showing up in that 7.7% same-store NOI growth for our RIDEA portfolio that I mentioned earlier.

Again, so much of our external growth is driven by the strategic growth plans of our existing operating partners.

Our relationship management professionals work directly with our operators to identify acquisitions, as well as plan new developments.

Of the nearly $600 million in new investment activity in the quarter, 83% came from these operators.

The best-in-class operators want to be on the HCN team.

They see our unique value proposition.

HCN brings operating efficiencies, big picture vision, and expertise to the table.

That's a true differentiator from any other investor in healthcare real estate, and it's why we're the partner of choice.

These relationships are incredibly valuable, and have been forged over many years.

Healthcare industry leaders like George Hager at Genesis, Chris Winkle at Sunrise, Patricia Will of Belmont, Tom Grape of Benchmark, Brenda Bacon of Brandywine, and the list goes on; are on our team, and help define our company and culture.

Simply put, you can't find a group of best-in-class operators like these anywhere else.

The success of our model extends far beyond the investment platform.

Our capital partnerships are similarly outstanding.

During the second quarter, we completed an ambitious $1 billion equity offering, and earlier this week, we announced the closing of our new $3.23 billion credit facility.

We have unparalleled, and for some time now, uninterrupted access to capital.

This is our covenant with our operating partners, to deliver the most flexible capital to help grow their businesses.

Other than becoming the CEO of HCN in April, which I think I covered on our Q1 call, and in numerous meetings with investors and analysts, we have had a few other noteworthy milestones in the second quarter.

Our Board elected Geoff Meyers as a Director.

Geoff is the former CFO of HCR ManorCare, and serves as a Director of HCA, one of the world's leading operators of hospitals.

Our ability to attract directors of this caliber speaks directly to the quality of our Company, and being a corporate governance leader.

We're proud and delighted to welcome Geoff to our Board.

On our last call, I mentioned that we would be expanding our London office, and John Goodey, who joined the Company during the quarter to run our London office, is on the call with us today here in Toledo.

I worked with John in London, and we've been colleagues for two decades.

John will offer some brief thoughts about our global investment platform, but first, I'll turn the mic over to Scott Brinker for more detail on our outstanding operating and new investment results this quarter.

Scott?

Thanks, Tom, and good morning, everyone.

I'm excited to share with you how HCN is building on its momentum.

Our Class A portfolio is leading the way, with another quarter of fantastic growth.

Same-store NOI grew 4.4%, marking 15 consecutive quarters above 3%.

We complemented that growth with just under $600 million of new investments, nearly all with existing partners.

We have more than 30 partners out looking for opportunities in their core markets.

When they find something attractive, they come to us for the capital.

It's a tremendous model.

Our relationships drive consistent deal flow, and better pricing.

Let's turn to the portfolio review, starting with seniors' housing.

The demographics supporting this business are powerful.

The target market is the age 80-plus population, which will double in size over the next two decades.

The near-term outlook is also favorable.

Demand is growing faster than supply in the vast majority of our markets.

As a result, same-store NOI in the operating portfolio grew 7.7%.

Occupancy, rate and margin all moved higher.

Success in seniors' housing requires two things: Good real estate, and a good operator.

We've been exceptionally disciplined about both points.

Quarter after quarter, you're seeing the benefits of that discipline, an organic growth rate that exceeds all benchmarks, often by a wide margin.

Here are two numbers that demonstrate the quality of the portfolio.

Our monthly rents are [50%] higher than the national average, and housing values in our local markets are 75% above the national average.

The Sunrise investment has been a tremendous success.

When we announced the merger in late 2012, we told the market to expect a 6% initial yield.

Just 18 months later, our yield on investment is 7%.

Half of the improvement is from NOI growth, and the balance is from attractive prices that we negotiated on joint-venture buy-outs.

The current market value of our $4.3 billion Sunrise investment is about $6 billion.

Turning to triple net seniors housing, the portfolio is all about predictable growth.

Same-store NOI increased 3%, right in line with guidance.

Payment coverage remained at comfortable levels, and is at the high end of the peer group.

Moving to skilled nursing, our rental income is well secured and growing consistently.

Same-store NOI increased 2.9%, in line with expectations.

For public reporting, we'll soon separate our skilled nursing portfolio into two segments: post-acute and long-term care.

Although they share the same skilled nursing licensure, these are two very different businesses.

They have different payers, patients, and cap rates.

Post-acute trades in the sevens, while long-term care trades in the eights and nines.

We like the post-acute business outlook because it helps reduce healthcare spending by getting patients out of the hospital.

We'll continue to invest into this sector with top-quality providers like Genesis.

Medical office.

We own and managed nearly 15 million square feet of outpatient medical space.

This is a highly-predictable income stream for HCN due to high tenant retention.

Our in-house property management team is doing a great job keeping the buildings full.

As a result, same-store NOI increased 2.1% last quarter, at the high end of guidance.

Investments, the market continues to be active.

Capital is flowing into this sector because of the attractive risk-adjusted returns.

Our relationships are more important than ever, allowing us to find opportunity in a crowded market.

Our partners helped us generate nearly $600 million of investments last quarter.

The initial cash yield was 6.8%, very profitable given that our spot cost of capital is in the low 5s.

Our activity included follow on acquisitions with Revera, Genesis, and Senior Lifestyles.

Follow-on business at attractive yield is our best measure of success, a forward-looking measure that our strategy is working.

Why do the industry's leading operators choose HCN?

One, consistent low-cost access to the capital markets.

Two, a shared vision of making the industry better.

It sounds soft, but it's incredibly important.

Remember that the best health care providers have a mission beyond profits.

Three, scale, which is important for group purchasing.

Four, analytics.

An example is our expense benchmarking tool that leverages our 700-plus senior housing assets, to give our partners new insight into their business.

And five, strategic advice, by sitting on the Board of many of our partners.

These make HCN unique.

We're playing on a different field than other capital providers.

Dispositions, we raised $141 million of capital last quarter by selling non-core assets for a $13 million gain.

We continue to be proactive in selling the bottom tier of our portfolio.

This helps us maintain the highest quality income stream in the sector.

Our investments so far have been concentrated domestically.

The pipeline includes activity outside the US.

John Goodey, who now runs our London office, is going to comment on international.

John?

Thank you, Scott.

Good morning, everyone.

I'm excited to have joined HCN at such a strong time for our firm.

Our international investment plan will follow HCN's well-proven investment and partnering strategy, and is highly focused and thought-through.

We see it as a logical progressive extension to our US investment platform.

With the opening of our expanded international office in London, we believe HCN is in an advantaged position and able to develop sustainable leadership in our chosen international markets.

HCN has already built the Number one position in the attractive UK prime elderly market, which is essentially the same as the US assisted living industry.

Importantly, we are seeing strong same-store NOI and rental coverage increases across our UK portfolio.

Working with our existing UK partners and beyond, we have a pipeline of high quality development and investment opportunities, and as Scott said, we believe we will be active in the near-term.

Hopefully in the future, we'll have the opportunity to host some of you in our new London office, and tell you more about our investment opportunities.

With that, I'll hand over to Scott Estes, our CFO.

Thanks, John, and good morning, everyone.

My remarks today will focus on the three themes that have emerged over the last several quarters.

First, our second quarter financial and operating performance exceeded expectations, and exemplify our platform's earnings power.

Second, we support our financial performance with prudent balance sheet management, and have significantly improved our credit matrix and capital availability as of June 30.

And third, we're increasing our 2014 guidance for the second time this year to reflect the strength of our second-quarter results.

I'll begin my more detailed comments by taking a look at our second quarter financial performance.

Our platform continues to generate superior earnings growth.

Normalized FFO increased to a record $1.06 per share for the second quarter, while normalized FAD came in at $0.94 per share, representing a strong 14% and 15% year-over-year increase respectively.

Results were primarily driven by the same-store cash NOI increase, and $2.7 billion of investments completed over the prior 12 months.

G&A for the second quarter, excluding expenses related to our CEO transition, came in at $32 million, in line with our expectations.

We will pay our 173rd consecutive quarterly cash dividend on August 20th of $0.795 per share, or $3.18 annually, representing a current dividend yield of 5%.

I'd note that our FFO and FAD payout ratios for the second quarter declined to 75% and 85% respectively.

As we continue to strive to enhance our disclosure, I would note that we've added pictures of every US-based asset in our RIDEA portfolio this quarter to the portfolio map on our website, as well as some photos of our most recent MOBs acquired during the quarter, and we'll continue to add photos from our portfolio as they become available.

Turning now to our liquidity picture and balance sheet, in terms of capital markets activity, the highlight of the second quarter was our secondary equity offering, which settled in early June.

We completed the sale of 16.1 million shares of common equity at $62.35 per share, generating $1 billion in growth proceeds.

This was the largest overnight offering completed, not just by any REIT, but by any company in any industry in 2014, based on total gross proceeds, which speaks to the capital market's continued support of our strategy.

In addition to the secondary offering, we issued one million common shares under our dividend reinvestment program during the quarter, generating $62 million in proceeds.

We also repaid approximately $75 million of secured debt at a blended rate of 5.8% during the quarter, and assumed $12 million of secured debt associated with an acquisition at a 4.1% rate.

On the bank capital front, this past Monday we were pleased to announce that we closed on a new $3.23 billion unsecured credit facility, consisting of a revolving line of credit, US term loan, and Canadian term loan.

This is largest credit facility in the healthcare REIT sector, and among the largest in the entire REIT industry, providing us with considerable flexibility in financing our future growth.

We have an option to upsize the facility by an additional $1 billion through an accordion feature, and can borrow up to $500 million in alternate currencies.

Broadly speaking, our new line enhances our liquidity and financial flexibility by increasing the capacity in our revolver by $250 million, lowering the average cost by more than 15 basis points, and extending the duration through October of 2018, with an option to extend by an additional year at our discretion.

This is an excellent outcome for the Company, and we're appreciative of the outstanding support provided by the 28 banks that comprise our new syndicate.

As a result of our capital activity and line renewal, we're in an outstanding liquidity position at quarter end.

More specifically, we have the full $2.5 billion line of credit available, and $207 million in cash, an additional $318 million of pending dispositions throughout the remainder of 2014, and are generating an additional $60 million of equity per quarter through our dividend reinvestment program.

We have limited near-term debt maturities, with only $123 million of debt maturing through year-end 2014.

Our balance sheet and financial metrics at quarter-end improved across the board as a result of our successful equity offering, all of which are now in-line with our strategic target levels.

As of June 30th, our net debt to undepreciated book capitalization was 39.8%, our net debt to adjusted EBITDA declined to 5.7 times, while our adjusted interest and fixed charge coverage improved nicely to 3.7 times and 2.9 times respectively.

As a result of the secured debt paid off during the second quarter, secured debt as a percentage of total assets declined 50 basis points to 12.1%.

I'll conclude my comments today with an update on 2014 guidance, and our supporting assumptions.

I'll begin with our same-store cash NOI growth outlook.

Given our strong second-quarter results, we are increasing our 2014 forecast from the previous level of 3.5% to a range of 3.5% to 4%.

The increase is largely based on the strength of the seniors housing operating portfolio, as our same-store cash NOI forecasts for the remaining components of our portfolio remain unchanged.

In terms of our investment expectations, there are no acquisitions included in our guidance beyond what we've announced through the second quarter.

Our guidance does include $69 million of additional development conversions throughout the remainder of the year at a blended projected yield upon conversion of 8.1%.

Our forecast now includes $450 million of dispositions at a blended yield on sale of 9.5%, representing an increase from the previous expectation of $250 million.

The increase is primarily related to the potential sale of an additional acute care hospital asset, later this year.

As we capitalize on another source of liquidity, and wind down the disposition of non-strategic assets.

There is no change to our annual capital expenditure forecast of $66 million for 2014, comprised of approximately $46 million associated with the seniors housing operating portfolio, and the remaining $20 million from the medical facilities portfolio.

Our 2014 CapEx as a percentage of NOI for both segments is still expected to run in the 7% to 9% range, which we believe is an appropriate level to maintain the quality of our portfolio.

In terms of G&A, there is no change to our annual forecast of approximately $125 million for the full year, excluding the impact of our CEO transition expenses.

And finally, we've increased our normalized FFO and FAD per share guidance for the full year as a result of our strong second-quarter operating results and investment activity.

I think it's important to note that the strength of our quarterly results allowed us to increase both FFO and FAD guidance by $0.02 per share, despite a $200 million increase in our disposition guidance and the additional shares issued through our June equity offering.

As a result we're increasing our normalized 2014 FFO guidance to a range of $4.05 to $4.15 per diluted share, and our FAD guidance to $3.57 to $3.67 per diluted share, both of which now represent a strong year-over-year increase of 6% to 9%.

That concludes my prepared remarks.

But I would finish by saying we feel great about our financial results, our enhanced credit metrics, and the improved financial flexibility provided by our new line of credit heading into the second half of the year.

And at this point, Tom, I'll turn it back to you for some closing comments.

Thanks, Scott.

I want to close by thanking everyone on our call for your support, by awarding HCN the highest multiple among our peers.

You recognize the unique value in our platform, a platform that can deliver the type of strong, predictable results we're sharing today, quarter after quarter.

HCN's business is different.

We're deeply engaged in the healthcare industry, not just as a source of capital.

We are unique in establishing a set of quantitative metrics and qualitative initiatives to help drive the seniors housing, skilled nursing, and post-acute, MOB, and acute care delivery systems forward.

Together with our partners, we are developing the most effective environments to improve healthcare outcomes.

Here's a simple message.

We are keeping people out of acute care hospital beds.

That's the key to driving down healthcare costs, and living within the Affordable HealthCare Act.

It's a big and important job, and HCN is uniquely qualified to do it.

Holly, please open up the line for questions.

(Operator Instructions)

And your first question will come from the line of Emmanuel Korchman with Citi.

Good morning, thanks for taking the questions.

Tom, maybe we can tie your last comment to a comment that Scott made, with the hospital sale.

I think Scott mentioned that you're capitalizing on the opportunity.

How much of that is overlaid with your view for the Affordable Care Act and other shifts in the medical landscape?

And is the hospital business one that you just don't want to be in general?

I'd say right now, the hospital business is not a prime focus of ours.

But what we want to do is align ourselves with the best hospital systems, to work with them to develop the best outpatient facilities.

That's really what our focus is.

And also creating links with our other sectors, like seniors housing and post-acute.

We think there is some very powerful connectivity that can be created between top quality health systems, top quality seniors housing, top quality post-acute.

So that's really where we're focused.

But owning hospitals is not really a priority for us today.

Got it.

And then John, welcome to the call.

A couple quick questions for you.

Do you see yourselves focusing on acquisitions, or development, or both, and maybe within what types of assets as we look globally?

Sure.

So I think firstly we're following the same model that we have in the US, so our partners are bringing us opportunities both in a development sense and in the acquisition sense.

And you know obviously our near $2 billion investment in the UK will give you an idea of where those opportunities in the short-term will lie.

I think beyond that, obviously, we've titled it international as opposed to the UK.

So I think we do look over time to clearly look internationally.

But again I think we'll follow the same strategy and focus that we've used in the US and in the UK and do that in a measured way, and do it only in the best markets and with the best operators.

I think it's probably a little bit premature right now to say we see this or this country as the absolute preferred country within Europe or beyond.

But I think as we go forward, we'll be able to give you a little bit more guidance on that.

Right now, I say we've got a great pipeline of opportunity with our existing operators and within our existing country, the UK.

Great, thanks.

And your next question will come from the line of Tayo Okusanya with Jefferies.

Congrats on the really, really solid quarter.

That was good to see.

Two questions from our end, first of all, can you just give an update on Genesis and what the latest is there, in regards to portfolio performance?

Tayo, Scott speaking.

Genesis is performing right on plan.

So they continue to have solid payment coverage, rent payment is well secured, they're gaining market share, occupancy, and quality mix, and trending higher recently.

So we're very comfortable with Genesis as an operator.

We made a big investment with them three years ago, and our thesis was that they were the best post-acute provider in the space.

And they've done nothing to suggest otherwise in the three years since.

Are patient volume trends improving in general?

Are you starting to see more of that?

Or is it still somewhat weak?

I would say it's more flat.

It bounces around quarter to quarter, depending on the season.

But overall, it's pretty flat.

Great.

That's helpful.

And second of all, could you just talk a little bit -- the environment in general for doing big acquisitions.

Each quarter, you continue to do very well with your original operators.

But in the world of $1 billion deals, whether it's senior housing or MOBs or what have you, what that looks like.

Are there are a lot of transactions out there?

What cap rates look like?

Who is bidding for this stuff?

Who is possibly winning some of this stuff?

That color would be helpful.

Scott speaking again.

I'd say we're as capable of anyone of doing a big transaction.

Structuring creativity, access to capital standpoint.

But that's not the primary way that we've grown our business.

The pricing there tends to be a lot tighter.

We tend to buy big portfolios with some lower quality assets.

And our model has tended to be back our existing partners on selective acquisition and development.

So it's much more disciplined.

There are times when it makes sense to buy a big portfolio.

So you'll see us look at all of that.

We'll just be more selective than some others.

Yes, just echoing what Scott just said, Tayo, I think our business model is different from others in this sector.

We work very closely with the best operators, and look at acquisitions with them, and work on their development plans together.

And that's why we like to say we offer predictable new investment growth, because the fact is, there is going to be more and more demand for top quality seniors housing and post-acute, particularly, just based on the demographic trends.

So we will continue to build those businesses with the operators.

And we'll occasionally bring in other new operators.

You've seen us do that.

We did it in the first quarter.

And where we don't have visibility, necessarily, is on the bigger deals.

Now you should assume that there's no big deal that will be done that we won't take a look at.

And sometimes we'll do them when they make strategic sense for us.

But you will never see us growing for the sake of just putting numbers on the board.

That's not how we run our business.

That's helpful.

And diving in a little deeper on that though, could you give us a sense of what the cap rates look like for some of the bigger deals in the market?

For some of the major property types?

Well, we didn't participate in the last two.

But they reported a yield around 6% for assets at least in our mind were not of the quality of the things that we're buying.

So that gives you a sense of where bigger portfolios are trading, at least for senior housing.

Okay.

Thank you

And your next question will come from the line of Vikram Malhotra with Morgan Stanley.

Can you give us a bit more color on the MOB acquisitions you did?

Where were they, what are you seeing in the market today, specifically, in terms of competition?

And just maybe give some existing stats on the quality of the portfolio as well.

How does tenant retention compare to what you've seen over the last year or so?

This is Scott speaking.

We did $216 million of medical office acquisitions in the quarter.

The yield was just below 6.5%.

Ten buildings, all of them affiliated with the health system.

Examples are HCA, Centura Health.

So big quality systems, the types that we want to be sponsoring our outpatient medical buildings.

And the average age was 2010.

So these are very modern buildings, without such lease roll.

Highly occupied, 95%-plus on average.

So hopefully, that gives you a sense of the types of assets that we're buying.

And overall in terms of the retention that you've reported in terms of tenant retention, is that pretty comparable to what you've seen over the last year or so?

Yes, it's been pretty steady, around 80% for really several years in a row now.

Mike Noto and his team at our internal property management group do a terrific job of building relationships with tenants and keeping them in our buildings.

It's a much cheaper way to maintain occupancy than trying to find a new tenant, building out the space again.

So it is clearly our preferred way to maintain occupancy.

Okay.

And Tom, one for you.

I mean obviously, you've talked quite a bit to us over the last few months, and obviously since you joined, but as you've spent more time going over things, any incremental thoughts, positives, negatives, in terms what you've either learned or where you feel you can take things?

I would say that no negatives come to mind.

I think the surprise for me was how deeply connected the management team here is to the operators.

That was something that as a former Director of the Company, I can honestly say I didn't have as strong an appreciation for.

And now actually having met all of our operators and spent time with them, it's really -- it's such a differentiator for this Company.

And something that I want to make sure that is really appreciated by everyone on this call.

And those who are not on this call.

Because that is what is allowing this Company really to deliver the kind of results that we delivered today.

Okay, thanks.

And congrats on the strong results.

And your next question will come from the line of Rich Anderson with Mizuho.

A couple questions.

In terms of the international, can you -- John, can you give us a sense of the acquisition or investment pipeline that you're seeing today?

What's the level of deal volume that's out there?

Not that you'll close on all of it, but that you may be looking at?

I think as we do in the US, we maintain a watchful eye over everything, because it educates us, even if we don't wish to proceed on particular acquisitions.

And I'd say the last six months, we've seen a tick up across Europe in assets that are coming to market, both on HoldCo basis, but also on propco basis as well.

And also companies looking to recapitalize themselves both in the financial markets as well as through potential property sales.

So I think the overall volume is good.

As I noted before, I think we're going to be highly selective, so a lot of what's out there is not going to be a HCN-style transaction.

Clearly we have comfort in a certain area in the UK.

That area's been active in the past, we see it being active in the future as well.

But beyond that, I would say that we have a very watchful and detailed eye over a number of sectors in a number of countries so we can educate ourselves, and we're working out exactly where we wish to place our investments going forward.

So the answer is the market is liquid.

There is opportunity out there.

Much of it won't be for Health Care REIT, but some of it will be eventually.

Okay.

And maybe said a different way to Tom, US is 88% of the portfolio today.

What do you think it could be five years from now?

Well, John, you give your view and then I'll --

Sure, I think clearly the opportunity, mathematically clearly the opportunity for us is to grow the percentage because of the leverage of percentage across Europe, international and the US portfolio.

I would say there is enough opportunity for us to significantly change that, if we wish.

But we'll be judicious in working out and working on only the best transactions for us.

But I would think mathematically, I would hope it will increase over time.

Rich, I'll tell you that we still see such tremendous opportunities for growth in the US.

So it's very likely while the -- our non-US portfolio, and I include Canada in that, obviously, will be growing, I think you're going to see the US growing tremendously as well.

One of the comments I'll make about the UK that I find so interesting, John and I were working with a -- I wouldn't call it a prime elderly, because their assets weren't very prime, but it was a seniors housing company back in the mid to late 1990s.

And we traveled all around the UK looking at a product that did not exist in the US.

We didn't have really government-provided seniors housing in the US.

We had long-term nursing home beds that people were in.

But government was not providing seniors housing in the US in the late 1990s.

There was, as you know, the private pay seniors housing business emerged in the 1990s.

So the UK understands this product and it is available from the NHS.

But as the UK has gotten more affluent, particularly London and the southern part of England, there is a recognition that one needs to be -- that one will be in this product when they get into their mid-80s.

But there's also recognition that I may have to pay for it.

It's not just a -- my unalienable right that the government, the NHS will provide me long-term housing, and that's what's interesting about the UK.

So we are, together with our operating partners there, really helping to offer a product that is actually early days.

I think we're seeing the UK start to embrace the fact that the NHS is not going to take care of my long-term care needs, that I need to do that myself.

And we have had dialogue with people around the UK government, and they're seeing us as really coming in there and helping to take pressure off the government.

The NHS cannot be all things to all people, for their healthcare needs.

And we're helping develop the whole notion that there's a private pay option.

And I think that's really exciting.

Another question is, big picture, the concept of -- will the day ever come when you'll think about breaking up the Company a little bit, in the sense that maybe the parts are more valuable than the whole?

I don't know that we're there yet, but when I think about the medical office side of the ledger, I think those are more capital partners as opposed to the -- your relationships that you have in senior housing and post-acute.

Do you think the day may come where you might look at a large portfolio that you have under the big umbrella, and think about a spin-co type of scenario?

You know Rich, the way I look at healthcare and healthcare delivery is, I see the real opportunity is through connectivity.

So we see how seniors housing, skilled nursing, post-acute, and MOBs fit together to improve healthcare delivery.

And again, it comes to the point that I made.

We need to get people out of acute care hospital beds.

And if you've been -- and I'm assuming you've been to Voorhees, New Jersey, and seen the Virtua system.

That's not a one-off, Rich.

I think that's a model by where healthcare needs to go.

And if you spoke to any component in that physical network we've created there, they are all performing well above where they thought they would be.

At the end of the day, they're providing a better outcome.

And that's what we need to do.

And that's how hospitals -- that's why I don't take hospitals out of the mix, because they're going to be penalized if they keep getting back Mr. Jones with the same issue, back in that hospital bed.

There are negative financial repercussions to seeing an individual keep coming back to that same bed.

They need to get them out of the hospital.

They need to improve the outcome.

And I think the connectivity is one of the ways we're going to make that happen.

So then the topic of spin-co, the answer is basically no at this point.

I never say never, Rich.

By the way I see the world today, I would say that's not something that we're spending any time thinking about.

And I understand that whole spin-co world, because as you know, I used to run a mall company.

Right.

Lastly for me, real quick, maybe to Brinker or somebody else, but when you look at your portfolio, 60% some odd senior housing, another 15% medical office, some hot property sectors, cap rates going down.

If you look at the whole portfolio, could you hazard a guess on what you think a cap rate should be applied to your full NOI stream?

Do you have any thought on that?

This is Scott Brinker speaking.

Based on comparable transactions we've seen recently, in adjusting for the quality our portfolio, I'd put senior housing no higher than 6%, same for medical office.

And skilled nursing is an interesting one, it's --

Be careful, Scott, I got my NAV model open here.

So I'm just ready for the cap rate number.

We're in the low 60s.

So let's see where you come out.

Skilled nursing is an interesting one.

It's about 15% of our NOI, and we really think of that as two separate businesses.

There's a post-acute business, that's highly focused on Medicare, a much shorter stay, typically a much higher quality building.

And then there's the long-term care model, that most people associate with skilled nursing.

Most of our skilled portfolio is post-acute.

And we feel like that business has a tremendous outlook, and should trade in the 7s whereas long-term care has -- I wouldn't call it a bad outlook, but not as favorable.

And those assets tend to trade in the 8s and 9s.

So before long, we are going to separate those two categories, so that you can hopefully value them differently, the way we do.

But again, I would put post-acute in the low 7s.

Like a 6.5 type number, aggregating it all up?

At most.

It's probably lower than that, given how much of the senior housing and medical office.

Okay.

That's all I've got.

Thank you.

Your next question will come from the line of Juan Sanabria with Bank of America.

I was just hoping you could speak a little bit about the post-acute space again, differences in coverage levels between the two different styles of businesses you highlighted.

And I don't know if it's too early, but if you could talk about the split within your overall exposure there between those two types of different assets?

Yes, Juan, it's Scott speaking.

The payment coverages are pretty similar.

We underwrite new investments to coverage in the 1.4 times range after a management fee.

So closer to 1.7, 1.8 before.

And we do that because reimbursement can be cyclical.

And we don't want to take any risk on the income stream, so we're perfectly comfortable at that type of level.

And then your second question was?

The split, the percentage of investments or NOI between the two different types, short-term, long-term stay?

We're still trying to figure out how to segregate the two businesses, but roughly, of our skilled nursing portfolio, two-thirds would be post-acute and one-third would be long-term care.

Okay.

And then on the RIDEA side of the business, can you talk at all the about any signs of cost pressures currently in the pipeline or in the foreseeable future either on food, labor, or insurance that may present more of a headwind for further margin expansion?

Food and utilities, well food and insurance are very flat, maybe up slightly, in part because of our group purchasing program.

Really no signature pressure on wages.

So we still see rates exceeding the growth in expenses.

So our margin was up 100 basis points year over year, and there still should be some opportunity.

Okay, great.

And just lastly, you provided, I think, on the last call, not sure if it was in the Q&A or in the organized statements ahead of time, the RIDEA growth by region on a same-store basis if you wouldn't mind?

Sure, Juan.

It was 7.7 for the whole portfolio.

The US was pretty much in line with that number.

Then the UK was higher, and Canada was lower.

So a similar trend to last quarter.

Okay.

That's it for me.

Thank you.

And your next question will come from the line of Josh Raskin with Barclays.

First question, just back on the dispositions, I want to make sure I understand the increase in the dispositions this year.

Is it solely that one hospital at $200 million, and maybe a little more to the catalyst for that sale, if it wasn't previously expected, is it just pricing has gotten a little bit better, if volumes or ACA have kicked in?

Or were you proactively shopping?

I'm just curious what the catalyst was there.

It's Scott Estes.

I'll start with the mix of the $450 million approximately, for the year.

Within that $450 million projection, overall, about 70% of that is hospital assets.

15% skilled nursing, 10% MOB, and maybe 5% seniors housing.

And yes, the specific increase, there's one potential sale that we think we could get home on this year, that was the driver of the increase.

Scott Brinker, any color you'd add to that?

No.

Was that just a one off or are there some medical office buildings or anything else attached to it?

We do own the medical office building that's attached to it.

It's a hospital in California that was expensive to build.

And the lease rate was maybe just higher than the hospital wants to pay.

So it's a mutually good outcome.

We'll continue to own the outpatient medical building that's attached, and the hospital is essentially buying the real estate back from us.

Okay.

So you're keeping the MOB.

And the second question is just on the senior housing operating portfolio, I think last quarter you talked about weather, a couple things impacting, and I thought maybe the same-store NOI might have been closer to 10%.

I'm certainly not scoffing at a 7.7% number in the quarter.

I'm curious if there was any pent-up demand on move-ins, or any reversal of what you saw in the first quarter, in terms of those pressures.

Did the second quarter benefit at all a little bit, or do you think this was a pretty good run rate number?

Well, we hope it's a good run rate number.

It's kind of hard to exceed.

One thing that we run into is even though the business is doing fantastic and occupancy is trending up, comparative quarters are just getting higher and higher as a threshold.

We hope we can grow 8% forever.

That seems unlikely, despite the quality of the real estate.

What we have people though, and we continue to believe is that we think we'll outperform this sector consistently, because of the quality of the real estate and the operators.

Got you.

Okay.

And then last question, maybe as you are seeing the CEO transition, and obviously you've done a lot of investments with your existing partners, your existing relationships, are you working on any new relationships, I don't know if it's bringing any additional partners into the mix?

Are you seeing any increase in external parties, that are interested in working with you?

Josh, it's Scott speaking.

I would say there's a handful of operators in the US, UK, and Canada, that we'd like to add to the portfolio.

But it's not a huge number.

Most of our growth is going to be with existing partners.

I think that tells you another thing, which is it's very difficult to reproduce the market position that we're in.

We feel strongly that the high-quality operators are a scarce asset.

And the vast majority of them have chosen to partner with HCN.

So anyone hoping to partner with the caliber of partners that we have, will be looking for a long time.

Because they're just not out there

Okay, thanks.

Our next question will come from the line of Michael Carroll with RBC Capital Markets.

In your comments, you said that senior housing demand is growing faster than supply in most of your markets.

Can you give us some examples of what markets of where supply is a concern, and if it's just a near term or long-term concern?

Sure, Michael.

It's mostly markets where there are low barriers to entry.

So think of Dallas and Houston and Denver, where there's a lot of land, and relatively easy entitlements.

So that's where we're seeing most of the new construction.

I guess the good news is, there's huge population growth in all those markets.

For the most part, occupancies are trending up in virtually all of our markets despite some new supply.

But if you look at markets like New York City, where many of you are on the call, if you've ever had to deal with placing a parent or a grandparent in a seniors housing facility, your options are quite limited.

There is clearly, in that market, which is a market that we have considerable assets in, there is tremendous demand, that's just growing.

And I think there's going to be an issue.

Because there it is very difficult to find good quality places for all of the elderly Americans that will need to be in -- whether it be independent or assisted living in the future.

So we're working very closely with our operators, many of them who are the leading names in, let's say, the New York City metropolitan area.

We're working very closely with them to try and figure this out.

Okay.

And then can you guys give us some color on the -- I guess the transaction activity?

It looks like you had a lot of good deals at some pretty attractive yield.

Are you seeing pressure on those yields, or do you expect that you can continue to acquire assets around the mid-6 range?

The market is definitely competitive.

That's not surprising to us.

The risk-adjusted cap rates are really strong against alternates in the real estate space.

So it isn't surprising to us to see new capital come into the space.

With yields in the mid-6s like last quarter, we can still make a pretty strong spread or profit.

Hopefully that continues.

We do have a pretty significant pipeline.

We'll see if it closes.

But I think that's a reasonable estimate for where we're trying to price deals, Michael.

Okay, great, thanks.

Your next question will come from the line of Nick Yulico with UBS.

A couple questions.

Scott, did the same-store guidance change for the senior housing operating segment?

I think was boosted to 6% last quarter?

It did.

We didn't give a specific number.

Obviously, it's been trending a little bit higher.

We had advertised 6% last quarter, our guess would be at least 6% to 6.5%, given the start we have to the year in the seniors housing operating portfolio.

And you've done about 8% year to date in that segment.

I assume the year over year in the second half maybe gets tougher, due to tougher occupancy comps?

And if so, can you remind us of the occupancy comps for the remainder of the year?

Since we don't have that data with the same-store pool changing this year?

I'm trying to think about that.

We don't have specific numbers in front of us.

Obviously in the supplement, you can see where the same-store occupancy was trending the third and fourth quarter of the year.

It was only about 88.8%, 89.2% in the third and fourth quarter of last year.

We're up to 89.3% as of this quarter.

So the point is it's a reasonably high number, but if it does well, we could still enhance occupancy.

But one way or another, it seems like the third quarter and fourth quarter year-over-year same-store numbers you reported for that segment are going to be somewhere in the 4% to 5% range?

Does that sound all right?

If you were at 8% year-to-date?

Yes, we would hope to do better than that.

We'll see.

It's possible.

And I would also say if we end up doing 5% or 6%, that should be viewed as a great number, and I'd say Scott Brinker's comments that we still think our relative portfolio performance will be great, vis-a-vis the other assets in that category.

Yes, I mean that's what I was asking about the occupancy, because it seems like in this quarter, you had the occupancy going up, rate went up looked like 3%.

So one of those trends -- seems like occupancy, unless there's a tough occupancy comp in the second half, it seems like your guidance here seems very doable for senior housing operating.

And it's probably going to exceed that.

Unless there's some occupancy issue we don't know about.

No, occupancy is trending higher.

So hopefully we'll continue to beat the guidance.

Okay, got it.

And then Scott, you talked about Sunrise now being worth with $6 billion of market value today.

What yield are you using on that?

Like an after CapEx type of cap rate?

About after CapEx, it generally isn't how people think about cap rates.

But something in the mid-5s given the scale and quality locations.

High quality operator.

I think that's being conservative, given some of the pricing we've seen on big details recently.

So it's value, you say the mid-5, I would assume that would include maintenance CapEx and it's -- what is it closer to 6 without maintenance CapEx?

I'm just giving you an NOI figure.

So no CapEx deduction which is typically how the market reports cap rates.

So mid-5 cap rate for Sunrise, for the $6 billion?

Yes, and that's being conservative.

We certainly wouldn't sell it for that.

Got you.

And if I go back to -- it looks like you own, in the supplemental, you own about 10,000 units at Sunrise.

That would imply that the per-bed valuation of Sunrise is somewhere around $600,000 a bed.

You bought it in the $400,000 a bed.

At what point, for those of us also looking at multi-family, where per-bed valuations of $600,000 tend to be only in cities or coastal California, and you can actually build for that or cheaper today.

At what point -- is there a ceiling in senior housing valuations, when your per bed gets up to these levels, that are now on par or maybe even exceeding the best multi-family across the country?

Yes, it's not that far above replacement cost.

We're building some assets with Sunrise right now.

You have to keep in mind the locations.

These aren't in suburban markets in Dallas.

These are in infill markets in Los Angeles, and Long Island, and London.

The cost of construction in those markets today is at least $400,000 per unit.

That's without any of the working capital or the five years it takes to get entitled.

So those numbers sound high, but that's what it costs.

That's the timeline to get something built in the markets where a Sunrise portfolio is located.

So it's a big number at $600,000 a unit, I agree.

But it's also very indicative of what it would cost to replace those buildings.

Right, and to follow up, does that then point to in those markets, if there is a piece of land could go for senior housing or multifamily, the yield to develop multi-family is going to be a lot higher at a similar per bed, which would point to it being that much more difficult to build seniors housing than multi-family in some of these coastal markets, which benefits you guys?

Yes, I think that's true.

And it goes to what I was -- the point I was making before, Nick, about the New York City metropolitan area, how difficult it is.

For instance, you'd be hard-pressed to find good quality seniors housing beds on the island of Manhattan.

These markets are tough, but they need to have seniors housing alternatives.

All right, thanks, everyone.

And your next question will come from the line of Karin Ford with KeyBanc Capital Markets.

Good morning.

Just a question on the development pipeline.

You don't have any conversions after 2015, 2016, and 2017.

They are zero right now.

Is that by design, or do you hope to backfill that pipeline, and how are the prospects for it, if so?

We're doing a fair amount of construction.

Not all of it is fully on balance sheet.

There are certain operators like Silverado and Brandywine where we do essentially a development lease and provide all the real estate capital.

We're also doing a number of programs with other partners in our portfolio, it's more like a mezzanine program, where we put up a small amount of money to help them get the project funded or built, and then we have a purchase option, not an obligation, but an option, generally at a predetermined price or formulate cap rate that allows us to buy the property either once it opens or once it stabilizes.

That price is typically below fair market value.

And there's a fairly large number of those, that should result in some substantial acquisition volume in 2015, 2016, and beyond.

Okay.

That's helpful, and that's the preferred method of investment in development from here?

We do a fair amount of it.

Okay.

And then just another question on the international investment side, what would you say is your required risk premium for investing in the UK, on an apples-to-apples basis?

And do you see these premia going higher as you look at additional countries around the world?

It depends on the location.

So we talk about the UK, but we really have to talk about specific markets within the UK.

And most of our assets are in London, and there's no risk premium there.

If anything, it's the reverse, given the dynamism of that market and depth of demand.

The south of England is comparable, very high-quality locations, fantastic demographics.

The further north you get, the higher the risk premium.

So no risk premium investing in London versus say investing in a like product in the New York City area for example?

Not today.

One would argue that London and New York are probably the best comps for each other.

And one could also argue that the growth characteristics of the London market would even outstrip New York's.

Okay.

And just last question, the CMS ruling last night, the 2% rate growth for skilled nursing, what impact do you think that'll have on your Genesis coverage from here?

No material impact.

It's in line with expectations.

It's better that we've seen in recent years.

So that should allow them to maintain coverage.

Okay.

Thank you.

And your next question will come from the line of Michael Knott with Green Street Advisors.

Question on senior housing operating.

Just curious your thoughts, when you look ahead, what's your thought on the mix of top line growth that you're thinking about between say pricing power versus occupancy gains?

Michael, it's Scott speaking.

It's really a location-specific tradeoff and an operator-specific tradeoff.

Either one is fine with us as long as they generate the revenue growth and the NOI growth.

It's been in the 4% to 5% range the last few quarters.

That seems to be the right trend looking forward.

And what's a full occupancy rate that you would strive for?

The portfolio is in the 89% range today.

I think it's possible to get in the 92%, 93% range.

That would be really strong.

I don't see that happening next year.

But when you think about what's possible, I think that's the high end.

Okay, thanks.

And then it looked like this quarter you did more senior housing triple net investment then on the RIDEA side.

I'm just curious if that's representative of a shift in thinking or risk appetite, or just how the deals shook out?

It's the latter.

We like to invest using both structures, and this quarter, it just happened that two of our big triple net operators came to us with opportunities.

Okay.

And then along those lines, when you're thinking about perspective investment activity, how much do you think about or consider target portfolio weightings?

Is that a governor in some cases or an objective?

Yes, there's definitely a framework that we think about that guides all decisions.

But we have to be opportunistic at some level and take what's available.

But the important piece for us is to always buy highest-quality assets and back the top quality providers.

That's the most important decision.

But we do think about the portfolio allocation in a strategic way, and we don't want to get too far out of balance.

Right.

We just in fact presented that to our Board yesterday.

They're very interested in understanding our portfolio management metrics.

So this is something we talk about a lot.

Okay, thanks.

And then just thinking about your investment activity going forward, I guess you don't include future acquisition in your guidance.

So more conceptually, when you think about investments over the back half of the year, how is the pipeline looking?

You've been fairly consistent so far this year, $500 million, $600 million a quarter.

Just curious, any thoughts on what we might expect to see?

I think that we're looking at a number of interesting opportunities in the -- generally from the way that we source our opportunities, as we've talked a lot about on the call today, Michael.

And so I think while past performance is no indication of future performance, I think you've been seeing us generate a similar level of new investment volume from our relationship machine.

So I think that's probably the best indication I could give you, of where we'll be through the latter part of the year.

Okay, and then a question, I guess this would be for Tom or maybe Scott Estes.

But Tom, in your closing remarks, you mentioned that HCN trades with the highest multiple in the sector.

And that essentially the equity market has re-rated HCN over time.

As you think about ways to grow into that multiple in the future and to continue to attract investors, obviously you have internal growth, external growth.

But curious how much time you spend thinking about the opportunity to get re-rated in the debt market over time, and is that another way to continue to grow your cash flow over time?

So Michael, I think about that all the time.

It actually wakes me up at night.

I will tell you, I think one of the things that I'm really focused on, making sure people understand, is our internal growth capabilities.

I think that's a differentiator.

I had one large investor say to me, who invests in other sectors of healthcare, including med tech, med device, bio tech, and said, "gee, I have a hard time finding names in those sectors that can grow internally north of 7%.

And they trade at multiples 2 times to 3 times higher than you".

That's one of the things I think about all the time.

Scott, you got a thought on that?

The only perspective I would add is that we think about maximizing value all the time for both our equity and debt holders.

And actually within our evaluation and compensation structure, we have both relative equity, multiple components as well as balance sheet and credit metrics and cost of debt components to see how we think about how we're doing successfully.

So it's definitely part of everything, and we think we're doing well, but want to do better on both fronts.

I guess just more specifically on the debt side, it seems like that could be an opportunity over time, right?

Sure.

Definitely.

We clearly deserve a better rating.

Okay.

That's it for me, thanks.

Your next question comes from the line of Michael Mueller, JPMorgan.

Just about everything has been answered so far.

Except I guess, more thinking about the international investments one more time, and looking out over the next year or two, what do you think the split will be between the UK prime elderly and any other product type in the UK or elsewhere in the continent or some other place?

I think from a -- we're well invested in our relationship in the UK environment.

So we have extremely good contact with all of the providers there on the prime elderly side, as well as in the other subsectors there.

I think given our footprint, again a bit like the US, for sure, given our capability of generating investment opportunities from within our existing portfolio, it's clearly going to be the lead of what we do in the next 12 to 18 months will come out of the UK prime elderly just because of the background we find ourselves in.

I think we clearly want to grow outside of that.

That's our plan, as we've mentioned a couple of times before.

Some of this will be opportunistic as well as us trying to deliver proprietary transactions.

That's very hard to give you a balanced sense to say we envisage 50% prime elderly and 50% other things, or 25% in the constant, et cetera.

I think we will continue to place our model over the opportunities we see in the marketplace to see where they fit us, and working on that basis, will drive the absolute percentage that we deliver.

Okay.

That's it, thanks.

(Operator Instructions)

And your next question will come from the line of Rob Mains with Stifel Nicolaus

Scott Brinker, this demarcation you talked about between post-acute and long-term care, is this going to be -- do you envision this being building by building, or will it be more portfolio or operator specific?

Probably building by building.

Okay.

But don't you have a continuum that you got to draw a line of demarcation in the middle of?

Yes.

Well, any one building will be in one category or the other.

And some, to your point, will be purely post-acute, and some will be almost purely long-term care.

So we haven't quite determined exactly what the dividing line will be, but that's the concept.

Okay.

And then I do have one, since it's late, in the weeds numbers question.

In the quarter you had a pretty significant increase in the FFO contribution from equity income of unconsolidated JVs, and included in that number was $4.5 million true-up.

I just wanted to know whether given that, we should use the current quarter as a run rate or something more akin to what we saw in Q1?

And if you don't have that detail in front of you, I can call you back later.

I do have it, Rob.

In short, that number should go down a bit, more toward first quarter levels in the second half of the year.

And what that line is -- where HCN is a minority owner.

So if there's things such as transaction costs around a Sunrise Management Company deal, or SRG acquisition where we're a minority owner, there's accelerated amortization of intangibles.

So that number is a little bit higher by the $4.5 million this quarter, but it should essentially not be there next quarter, or be lower.

Got it.

That's very helpful.

Thanks, that's all I had.

Todd Stender with Wells Fargo.

Going back to new development.

Your construction yields remained fairly elevated at 8% plus despite acquisition cap rates that continue to head lower.

How to you categorize pressure, if any on development yields?

Particularly as the arbitrage between building yields and market yields remains so wide?

Todd, this is Scott speaking.

The capital that's entering the space is looking at acquisition and development.

So I think both are being impacted in similar ways.

So there has been some acquisition cap rate pressure over the past 12 months, and the same is true, development yields.

We try to maintain a much larger spread, whenever we fund development, just because of the inherent risk.

Both the lease-up as well as the time value and money.

So generally, we've been able to get in the neighborhood of 150 to 200 basis points of premium for development.

And that's what we'll continue to target.

That seems like a longstanding spread.

Has that come in a little bit recently?

No, I don't think so.

Not intentionally.

It may just be specific transactions, Todd.

Okay.

And just in the past, I would say your development exposure, broadly speaking, weighed on your valuation, but really not anymore.

Is that a fair assessment?

Tom, you talked about valuation before.

But have investors either have a higher comfort in your development, or just represented by a smaller percentage of the overall portfolio?

I think a little of both there.

I do think -- I think people have grown comfortable with our development capabilities over time.

But I think they come from, again, relationships.

Great, thank you.

And your next question is a follow-up question from the line of Michael Knott with Green Street Advisors.

Just to come back to the pricing power question on senior housing operating, can you help me understand the pricing power that you have, or you think you have, with respect to rates, or service income when we look at your average RevPOR being so high, so far above the national average?

Just curious, your sense of do perspective residents start to push back?

Just help me understand the pricing dynamic there, and the power you have.

I'm sure some residents push back.

You definitely have to find the equilibrium.

And we hear about that from a variety of sources occasionally.

But in the last three or four years, the average rate growth in the operating portfolio has been in the rate 3.5% to 4% as an average.

And that's roughly twice the national average reported by NIC.

It's also about twice the rate of inflation.

Part of that is the fact that occupancy has moved higher.

But more importantly, it's just where the buildings are located, and the affluence surrounding them, and the high-quality operations.

The buildings are providing a service that people are willing to pay for.

Michael, I think you recently toured some of our LA area properties?

Yes, that's right.

So you understand that, for instance the Belmont property Wilshire Boulevard, if you are lucky enough to be able to live there, because of the price, Belmont will have tremendous pricing power because of that location, because of the quality of service.

And I think that it has a community of residents that for the most part are fairly resilient financially.

While they may not like the increases that will be pushed onto them, they're not going to move out because of that.

And they are getting superior service in a superior location.

Right.

And I understand, Scott, your comments as well, about how strong it's been the past few years, I guess just looking forward.

Do you expect that type of above inflation pricing power will continue?

Yes, we hope so.

Not sure that it's going to be twice as high as inflation, like it has been.

But we would expect a premium.

Okay, thanks, and then on the disposition side.

I think you have now sold $2 billion or $2.5 billion, if I recall, over the past couple years, including this year in that total.

Thinking about 2015 and beyond, should we think about some dispositions, when we think about where your earnings are going to come in or are you mostly done?

I think we'll always recycle some level of assets and look to be proactive in managing the portfolio.

But my guess would be, and it feels like the strategic disposition effort is winding down.

So I would think it would be a lower number that you've seen on average over the last two or three years.

Okay, and then on the balance sheet, Tom, we were all pleased to see the equity offering and see that leverage come down a little bit.

Just curious your sense, or Scott, your sense of how much more improvement you anticipate over the next couple years respect to your leverage, and goes to the last recent question I asked about cost of debt and balance sheets.

Yes, Michael I'm quite comfortable with the range that we're at.

And I think as I said, I mentioned on maybe the prior question or two, I think we deserve an upgrade.

I think we've -- I think are very focused on liquidity here, and the quality of our balance sheet.

I think we have a very good quality balance sheet.

I think our metrics are where they should be.

I don't think I would be in favor of raising equity, just to pay down debt, beyond where we are today.

I think we have a comfortable band that we've operated in, with respect to the balance sheet, over the last couple of years.

And I would expect it's going to stay there.

Another thing that wakes me up at night is our rating.

And so I'm going to be spending some time with the rating agencies, trying to get them to understand our business a little better, and hopefully awarding us a higher debt rating.

Even if you don't want to just straight delever, what about continuing to fund additional investment activity with a greater proportion of new equity, like you did this last quarter, as a way to further improve the balance sheet?

Is that something you think about?

Yes, we look at all possibilities, Michael.

And I think that's what's important to us is having as many oars in the capital waters as possible, and we'll always do -- every decision we make is based on what's in the best interests of the shareholder.

And that's how we manage our balance sheet.

So again, we're exploring lots of different ways to attract capital here, knowing that the capital markets may not always be as accommodating as they have been in the last few years.

So again, flexibility is most -- is paramount here.

Okay.

Thanks for answering all the questions.

You know we'd like to see even lower leverage.

Thank you.

Okay, Michael, thank you.

And that will conclude the question-and-answer portion of today's conference call.

We'd like to thank everyone for their participation and this will conclude today's call.

You may now disconnect.