Welltower Inc (WELL) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2015 Health Care REIT earnings conference call.

My name is Holly and I will be your operator for today.

(Operator Instructions) as a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Jeff Miller, Executive Vice President and Chief Operating Officer.

Please go ahead, sir.

Thank you, Holly.

Good morning, everyone, and thank you for joining us today for HCN's first-quarter 2015 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 HCN 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 Tom DeRosa, CEO of Health Care REIT.

Tom?

Thanks, Jeff, and good morning.

Resiliency is a word too often used by CEOs to describe their financial performance, but I cannot think of a better word to describe our quarter.

It is no secret that Snowmageddon in New England and an epic flu season presented severe headwinds to many of our operating partners.

Nevertheless, we are right on target, at $1.04 per share normalized FFO and same-store NOI growth for the entire portfolio up 3.1%, in line with our 3% to 3.5% forecasted for 2015.

If we were a passive owner of real estate, we would have watched these negative events from the sidelines and they may have caused us to deliver some very disappointing results.

HCN, however, has invested significantly in state-of-the-art asset management systems that give us timely data on operations and allow us and our operating partners to make timely adjustments for unforeseen or unexpected negative events.

We take a unique, hands-on approach to this business here in the US and with teams of professionals on the ground in London and Toronto.

That is how you build a resilient operating business.

These results were also delivered in a quarter where we successfully priced a $1.5 billion equity offering, the largest in our history.

Consistent operating performance driven by our best-in-class operators, combined with industry-leading new investment volume, has resulted in strong earnings growth that is significantly driving down our leverage.

As a result, in March we were awarded a BBB+ rating by Fitch.

Scott Estes will provide additional commentary on our improving leverage position.

As for industry-leading new investment growth, this was a tremendous quarter.

Our relationship investment strategy resulted in $2.2 billion in new investments, $1.8 billion of that from our existing operators like Benchmark, Genesis, and Avery.

Our strategy is to invest in the best-quality healthcare real estate across the healthcare continuum.

We have sold over $3 billion in lower-quality long-term-care SNFs and other nonstrategic assets and reinvested the cash in the best-quality healthcare real estate in the best markets.

A great example of this is the new investment we made in Aspen Hospitals, four acute-care private-pay hospitals in London, this quarter.

These top-performing and modern hospitals are located in some of the most affluent neighborhoods in the world, like Wimbledon and Highgate.

Aspen is under contract to be purchased by Tenet Healthcare, and we expect as of the third quarter these hospitals will be operated by Tenet.

These hospitals are approximately 90% private pay; and 70% of revenue is from outpatient services.

They will be an anchor to our London portfolio of 40 senior housing assets managed by Sunrise, Avery, and Signature.

15 of our elder-care communities are within the catchment area of these hospitals.

I know many of you are familiar with our healthcare village, as we call it, in Voorhees, New Jersey.

In London we expect to drive similar operating synergies to those that have been captured in Voorhees between Virtua Hospital, Brandywine, and Genesis.

With respect to asset sales, we just announced the sale of our life-sciences portfolio this week.

This investment was a home run for our shareholders, returning 15% unlevered IRR.

This opportunistic sale for HCN is a strategic acquisition for Forest City, as this asset will become a core income-producing asset for Forest City going forward.

Forest City has been a great partner, and we wish them continued success.

We celebrated the opening of our new Toronto office last week.

Our Canada business will be run by Colin Catherwood, a tremendous addition to the HCN team, as he has a long history in the Canadian healthcare market from his years at Brookfield.

He is joined in Toronto by Connor MacLennan, a top-performing member of the Toledo investment team.

I am also pleased to announce that Barbara Montresor will join us next week as Senior Vice President for Media and Communications.

Barbara comes to us from Johnson & Johnson and brings a wealth of global healthcare communications experience that will benefit both HCN as well as our operators as we strive to position seniors housing, post-acute, and outpatient medical real estate as key elements in driving down costs and yielding better outcomes in healthcare delivery.

Scott Brinker will now provide you with greater detail on our new investments and operating performance in the quarter.

Scott?

Thank you, Tom.

I'm going to kick off with investment activity.

Our deep relationships drove $2.2 billion of carefully selected investments last quarter.

The vast majority was follow-on activity with our existing partners and was sourced in private negotiations.

As a result, the blended initial yield is a healthy 6.9%, well above our cost of capital.

The list of repeat clients was long and included Rivera, Benchmark, Avery, Belmont Village, Cascade, Brandywine, Mainstreet, Genesis, Signature, Kelsey-Seybold, and Merrill Gardens.

We have a simple but highly disciplined investment strategy: high-quality real estate, trusted operating partners, and aligned interests.

Our partners continue to bring us opportunities that meet these criteria.

What is equally exciting is that our network of partners is growing.

Last quarter we added two new relationships.

The first is Oakmont, who develops and operates Class A senior housing properties in California.

We acquired two of their new developments, which achieved stabilized occupancy in just four and nine months respectively.

The second is Aspen, a leading private-pay hospital provider in the UK.

We completed a sale-leaseback on their four crown jewels.

There is a nice presentation about the Aspen investment on our website.

The properties are located in extremely affluent densely populated submarkets in London, which is now our number three market.

London is joined by New York, Philadelphia, Boston, and Los Angeles in our top five.

We listened to your feedback and included lots of detail about our investments and dispositions in the earnings release.

All assets are not created equal.

The cap rate tells only part of the story, so we are making a major push to tell you more about our investments and our existing portfolio.

Our experience is that higher-quality real estate the leads to superior, more resilient growth.

And by virtually any metric and against any benchmark we compare very favorably: NOI growth, rental rates, building age, local income, and housing values.

Scott Estes will tell you more about our enhanced disclosure.

Speaking of high-quality real estate, earlier this week we agreed to sell our life science interest back to Forest City for $574 million, which is 5 cap on forward NOI.

That pricing underscores the inherent value of owning Class A real estate.

We will recycle the capital just as we have done on roughly $3 billion of asset sales in the past five years.

We saw the benefit last quarter of having built a diversified portfolio: posted 3% same-store growth in the operating portfolio despite a flu season that significantly impacted occupancy in many of our core markets such as the UK, Canada, New England, and Mid-Atlantic.

The national health departments report that flu-related hospitalizations increased over last year by roughly 90% in the US, 70% in the UK, and 50% in Canada.

The flu caused an unusual spike in moveouts that we estimate reduced occupancy by 100 basis points and reduced NOI growth by at least 150 basis points.

Importantly, the spike in moveouts is a temporary issue.

Demand remains strong across the portfolio.

Movein activity continues to be excellent and rental rates were up 3% versus last year.

The flu season was long this year, so occupancy hit a trough in mid-to-late April and only recently began to improve.

As a result, same-store growth in the operating portfolio will likely be low single digits in 2Q, then move higher through the second half of the year as occupancy gathers momentum.

Looking through the unusual circumstances this winter, the fundamentals of the business remain strong.

Our operating partners are universally positive about the outlook.

Moving to triple-net seniors housing, same-store NOI grew 3.4% last quarter.

It is an excellent result that is once again well above inflation.

As a reminder, we don't include any fee-related income in any of our same-store metrics.

We think this provides a more accurate picture of underlying performance.

Turning to post-acute and long-term care, our rental income is well secured and growing consistently.

Same-store NOI grew 3.1% last quarter.

Genesis just reported an excellent first quarter, particularly in our portfolio, with solid expense control and improved occupancy and queue mix.

They expect to be headed towards 1.4 times corporate level payment coverage by year-end, with upside thereafter.

Next up is outpatient medical.

This business segment continues to churn out predictable, steady growth.

Same-store NOI increased 2.8% last quarter.

The convenience and low cost of outpatient care is in great demand from consumers, payors, and providers; and our platform is well positioned to capitalize.

In summary, our deep relationships, best-in-class portfolio continue to deliver shareholder value.

Scott Estes will now discuss our financial results.

Thanks, Scott; and good morning, everybody.

The one message that I would like all of you to take away from my comments today is that HCN has made tremendous strides in strengthening our balance sheet over the last five quarters.

We remain committed to maintaining a more conservative credit profile.

This should allow us to continue reducing our cost of capital, enhancing our valuation, and providing future financial flexibility.

My specific remarks today focus on our recent financial performance, the strength of our balance sheet and liquidity, and we will provide an update on the key assumptions driving our 2015 guidance.

I will begin by taking a look at our first-quarter financial performance.

Normalized FFO for the quarter increased to $1.04 per share, while normalized FAD came in at $0.92 per share.

All in all we view this as a solid quarterly performance in light of the harsh winter and flu season as well as raising nearly $1.5 billion in equity in the middle of the quarter to finance a portion of our first-quarter acquisitions that weren't completed until the end of the quarter.

We are right in line with where we need to be at this point in the year and have maintained our earnings forecast at previous levels, which I'll discuss later in my comments.

More importantly, we strengthened our balance sheet, enhanced our liquidity, and set ourselves up for an even stronger second half of the year.

We had two notable revenue line items this quarter that I'd like to take a moment to explain.

First, interest income increased by about $6 million sequentially in the quarter to $17 million.

That was largely as a result of the $360 million loan to Genesis disclosed in our earnings release.

Second, our other income line came in higher than usual at $5.1 million this quarter, as it includes $2.1 million in loan prepayment fees from an operator that paid off a loan during the quarter.

To be clear, however, as Scott Brinker mentioned, we do not include fees such as this in either our normalized earnings results or in our same-store portfolio NOI metrics.

In terms of dividends, we will pay our 176th consecutive quarterly cash dividend on May 20 of $0.825 per share, a rate of $3.30 annually.

This represents a 3.8% increase over the dividends paid last year and represents a current dividend yield of 4.7%.

In addition to the new disclosure provided in our earnings release that Scott Brinker discussed, we were similarly proactive enhancing both our supplement and interactive portfolio map on our website this quarter.

I think we probably made more changes than I can review on the call today, but a few of the most significant enhancements include the following items.

First, wherever applicable within the supplement we provided portfolio information on a pro rata NOI basis as opposed to depreciated investment balance.

I think page 6 is a good example of this, where you can see we now disclose portfolio diversification by NOI.

Next, on page 4 and 5 we provide the operator and address of every property acquired during the quarter.

On page 8 we added specific information about Genesis's portfolio performance, which includes trailing 12 months facility level and corporate fixed charge coverage.

Page 9 provides new quality indicator disclosure, which compares our portfolio to various industry benchmarks to provide additional insight into the relative quality of our assets.

Page 10 provides new detail regarding the five largest expense items in our same-store RIDEA portfolio.

Last, if you take a look at a portfolio map on our website, we added visualizations allowing the user to see how our portfolio is strategically positioned in major urban wealth centers and areas with above-average senior population growth.

We also created a visualization which allows users to see our top markets by NOI, as identified in our supplement.

Turning now to our liquidity picture and balance sheet, the highlight of our first-quarter capital markets activity was the largest secondary equity offering in Company history, which settled in late February.

We completed the sale of 19.55 million shares of common equity at $75.50 per share, generating nearly $1.5 billion in gross proceeds.

In addition, we issued 766,000 common shares under our dividend reinvestment program, generating $59 million in proceeds.

We generated $188 million of proceeds through the sale of nonstrategic assets and loan payoffs, which included $59 million of gains in loan fees representing a blended yield on total proceeds of 8.3%.

And last, we repaid approximately $208 million of secured debt at a blended rate of 4.1%, and assumed or refinanced $289 million of secured debt at a blended 3.5% rate.

So as a result of these activities, we ended the quarter in a very strong liquidity position with $2.1 billion available on our (technical difficulty) an additional $202 million in cash, and anticipated net cash proceeds of approximately $630 million from dispositions forecast throughout the remainder of the year.

As a result of our recent financing activity and portfolio performance, our balance sheet and financial metrics as of March 31 are in the strongest position in quite some time.

We are pleased to have received the recent upgrade in our corporate credit to BBB+ from Fitch in early March.

This rating increase is already providing a direct benefit for our shareholders in the form of a 12.5 basis point reduction in the cost of our line of credit and a 5 basis point reduction in our annual credit facility fee.

I think the commitment to strengthen our balance sheet is best exemplified by the fact that we have issued nearly $4 billion of equity over the last 15 months.

We have made such huge strides in enhancing our balance sheet recently that I would like to highlight the specific improvements we've made during just the last five quarters alone.

If you look between December 31 of 2014 and March 31 of 2015, our net debt to undepreciated book capitalization improved by over 5 full percentage points to 37.3%.

Net debt to enterprise value declined nearly 11 full percentage points to 27.4%.

Net debt to EBITDA improved 60 basis points, from 6.1 times to 5.5 times.

Interest coverage improved 50 basis points from 3.4 times to 3.9 times.

Fixed charge coverage improved 40 basis points from 2.7 times to 3.1 times.

And secured debt as a percentage of total assets declined nearly 2% from 13.2% to 11.3%.

I think it is important that we have made these balance sheet improvements while generating a significant 9% increase in normalized FAD per share during calendar 2014, and continue to forecast 5% to 7% normalized FAD per share growth in 2015.

I do think it is interesting to note that if we chose to raise $1.5 billion of 10-year debt in February instead of $1.5 billion in equity, our book leverage would be flat over the last five quarters instead of improving 5%; but 2015 FFO and FAD would be about $0.09 higher than our forecast today.

So clearly we have emphasized the strength of the balance sheet and long-term financial flexibility over short-term earnings growth.

I will conclude my comments today with an update on the key assumptions driving our 2015 guidance.

In terms of same-store cash NOI growth, we continue to forecast blended same-store growth of 3% to 3.5% for the total portfolio in 2015.

Our forecasts are generally unchanged for the respective portfolio components; but as Scott mentioned, we are forecasting slightly slower growth during the first half of the year in our seniors housing operating portfolio that is expected to pick up during the second half of the year.

In terms of our investment expectations, the only acquisitions in our forecasts are what we have closed in the first quarter and the approximate $200 million of investments expected through our Mainstreet partnership throughout the remainder of the year.

Our 2015 guidance also includes a little over $200 million of development conversions at a blended projected yield of 8.2%.

In terms of our disposition forecasts, we now expect to receive proceeds of approximately $1 billion for the full year, including the anticipated sale of the interest in our life science portfolio, which brings our expected yield on total disposition proceeds for the year down to approximately 7%.

Our capital expenditure forecast is now approximately $58 million for 2015, which is comprised of approximately $39 million associated with the seniors housing operating portfolio, with the remaining $19 million coming from our medical facilities portfolio.

This represents a slight reduction from our original expectations, but is largely due to timing.

These amounts continue to represent a relatively modest 7% of anticipated NOI in both asset categories.

Our G&A forecast remains approximately $145 million for 2015, which is right in line with our previous forecast.

And finally, we are pleased to be in a position to maintain our 2015 earnings guidance in light of the significantly tougher operating environment early this year, while adding the sale of our life science investment to our forecast.

As a result we continue to forecast normalized FFO in a range of $4.25 to $4.35 per diluted share, representing 3% to 5% growth, while our normalized 2015 FAD expectation remains in a range of $3.83 to $3.93 per diluted share, representing a solid increase of 5% to 7%.

I will conclude my remarks today by reemphasizing the great strides we've made in enhancing our balance sheet, lowering our cost of capital, and retaining the significant liquidity to execute our business plan, which should continue to drive the consistent financial performance you expect from HCN.

At this point I will turn it back to you, Tom, for any closing comments or to open it up for questions.

Thanks, Scott.

Holly, if you would please open up the line for questions.

(Operator Instructions) Nicholas Yulico, UBS.

Thanks.

First off I appreciate all the expanded disclosures in the supplemental.

It's great to have that info.

On the senior housing operating portfolio, can you -- I think you said, Scott, low single digit for second quarter.

And I wasn't sure if that was same-store NOI.

Yes, that's right, Nick.

It should be in the same neighborhood as the first quarter, just because of the dip in occupancy.

It took a while to bounce back this year.

Moveouts are great.

Unfortunately moveouts continued to be way above normal until late April.

Then just going back to the guidance you gave for that segment last quarter, I think you said 5% same-store NOI growth, about mid 4% same-store revenue, and 4% same-store expense growth.

Are you still targeting something similar for that?

What are -- how do you get back up closer to 5% if you're going to have the first half of the year close to 3% it sounds like on same-store NOI growth?

I think that's right, Nick.

It could end up being a bit below 5% for the full year, because of the weak first half of the year.

The run rate I think we remain confident is in that 5% range.

So that's really what we are focused on.

The operators are very positive about what they are seeing at the facility level.

Just had a really bad flu season.

Yes, what we saw, Nick, in the first quarter was unprecedented in terms of the flu season.

Particularly in the UK was something that we would have never anticipated.

I think the fact that we were able to report what we have reported is a tribute to our operating model.

Because it could have been worse.

Right.

Then Tom, just a bigger-picture question.

Your senior housing operating pool is now about 35% of what you own.

It's sort of on the higher-end historically; it's been that way for the past year.

How are you viewing that segment in relation to the total Company size?

Historically it's not the equity investors who are going to push back on that getting bigger; it's the rating agencies who have looked at the segment differently than, I think, equity investors, who are more positive on it.

So how do you --?

Are you able to get that bigger, or are the rating agencies going to push back on that?

Nick, I think it's important for both the equity and debt investors to understand that we -- these RIDEA investments have been made associated with operating investments and asset management investments, technology investments on our end.

This is not a passive investment for us.

I think that when people see how we manage that business and the amount of people and resources we devote to it, I think that they get comfortable with it.

They get comfortable that we can drive the upside that you believe that we can generate from having that percentage of RIDEA in our business model.

Okay.

So you think you could take it higher and the rating agencies would be fine with that?

I think the rating agencies as they spend more time with us will get as comfortable with it as you are.

All right.

Thanks, Tom.

Mike Carroll, RBC Capital Markets.

Thanks.

Can you guys give us some color on why you like the private hospital market in the UK?

Why do these investments warrant such a low cap rate, that's in line with the senior housing community?

I'll start off.

We think that private-pay hospital business in the UK is tremendous, and when I say UK I'm talking about London.

There is a long, developed, private-pay healthcare market in London.

And given the issues in the National Health Service there, we see these assets having tremendous growth in the future.

You also need to understand that the assets that we bought are in some of the best locations for any kind of real estate on the planet.

The residential market that surrounds Parkside Hospital in Wimbledon and Highgate in North London, these are markets where residential home prices start somewhere in the equivalent of $7 million.

So these are very affluent markets, with strong positions providing largely outpatient medical services to very affluent communities.

And what we are excited about is our ability to connect these hospitals to our elder-care communities.

As I mentioned, 15 of our assets in London are the immediate catchment area of this hospital portfolio.

So we are very bullish on this business.

Scott?

Yes, Mike, I would also just point to the public company valuations, because it really is a different business.

The hospital providers in the US tend to trade at 7 or 8 times, even the very best ones; whereas in the UK those multiples are more like 10, 11, 12 times, because it's just a different business.

Tom mentioned how much of the revenues from outpatient services, which just leads to better pricing power, more stable demand.

So I think they are labeled as hospitals, but it's important to think about them as different businesses.

There is a pretty long history of the propco/opco structure in this sector, and the lease yields have been very low over time.

So we actually feel like the yield we got is remarkably high given the locations, and now the credit quality from Tenet who is a $5 billion equity market cap company with $2 billion of EBITDA.

Then are you only focused on the hospital investments around London and not the rest of the UK?

I think there are some other good markets in the UK.

Again we are generally focused on investing in private-pay assets in affluent markets.

That's our strategy.

So there may be assets that will become available in some of the better markets outside of London, and we would certainly consider them.

Okay, great.

Thank you.

Smedes Rose, Citi.

Good morning.

I just wanted to ask you, big picture, it seems like your transaction activity over the past couple of quarters has been running considerably higher than in prior quarters.

I just was wondering if there any particular factors in play that you could cite, whether it's pricing, or just available product coming to market, or opportunities that your partners are finding.

Then I had a follow-up question on your hospital investment in the UK afterwards if I could.

It's Scott Brinker responding.

The last two quarters were clearly blowout quarters from an investment standpoint, and average of $2 billion a quarter.

That's not the right run rate.

Those were unusually high.

It was just opportunistic.

The consistent theme, though, is our partners are bringing us these opportunities, and that does lead to more consistent and higher volume of deal flow than I think most of our peers would see.

So the outlook is strong.

The underlying thesis I think is fantastic.

But $2 billion per quarter is definitely at the high end of what we would expect.

Then on your hospital investment, you mentioned that UK it's really -- you mean London.

I'm just wondering -- maybe this is out to nutsy.

But is it a function of -- there a lot of foreign folks that live in London and bypass the UK healthcare system and are pretty well-heeled.

Is that a big piece of the patient population at those hospitals?

Or are these really UK citizens that are using these services?

Smedes, you know that London is a very international -- has a very international population.

I lived there and was not able to use the National Health Service.

We had to use private healthcare, so -- and I would say the ex-pat community has grown exponentially since I lived there in the early 2000s.

So there is a strong market there.

There's always been a market of people that travel to London for healthcare; and then you have many people that are opting out of the NHS because of the fact that they don't want to wait for certain types of surgeries.

The NHS is plagued by the dreaded queue, as they call it, for surgical procedures.

So many people opt to bypass the NHS.

The other piece of this is that the NHS will often look to the hospitals that we bought as places to put patients in because they cannot treat them properly in their system.

They may not have beds available.

So oftentimes any empty beds are filled by NHS -- people covered by the NHS.

Okay, thanks.

Do you think that that trend is something that you would see in other major European cities?

Or is it something that's right now peculiar to the UK, or particular to the UK?

London has always had a very well-developed private acute-care hospital system.

You don't see that to the same extent in other countries in Europe.

But there are some.

Spain has a private-pay acute-care hospital system, some very good hospitals.

You see them in a few other countries.

But I would say no country in Europe has developed what the UK has developed over many years.

Okay, thank you.

Joshua Raskin, Barclays Capital.

Thanks.

Just wanted to start on the Genesis loan, and how did that come about?

Was this just you guys being good partners in a long-term relationship?

Or do you think there's more opportunity to start thinking about loans?

It was not part of an overall strategy to start doing more loans.

When we do a loan, it's with an important partner, and Genesis certainly qualifies.

The skilled health portfolio included a lot of owned assets, and there was a big loan secured by those assets that couldn't be assumed by Genesis as part of the merger.

To get the deal done they asked us to help out, and we were happy to do that.

It's really a transformative deal for Genesis: materially changes their operating platform as well as their financial statements in a positive way.

This loan will be outstanding for roughly a year; we will make a nice return; and Genesis will end up being a substantially stronger company today but also a year from now.

So it was really one-time in nature.

This is not a change in strategy, where we are going to move away from doing high-end private-pay, high-end locations.

That will remain our investment strategy.

Josh, we like to own real estate.

We're not looking to use our low cost of capital to book some high-yield loans.

In this case for Genesis, this loan is a bridge for Genesis to owning real estate; makes them a stronger company.

But that is not an area that we are focused on for new investment volume.

We want to own real estate.

Okay, that makes sense.

Obviously it looks like a good deal for them, so I certainly understand the partnership mentality on that.

The second question just on initial yields and investment relationships versus new partners, I'm just curious.

Do you guys think about required returns differently for a new partner in terms of what is the opportunity, and longer-term is that a part of the calculus?

I think the more important part of the calculus is: Who is the partner?

What are the assets?

We tend not to get too worked up about 10 or 20 basis points on the yield.

The real question to us is whether this is a partner that really meets our standards.

And Oakmont and Aspen did.

They own the types of assets that we want to own.

They're continuing to grow their business through acquisition and development, and we think they will come to us to help them do that.

That is really the important part of our calculus, not whether the yield is 6.1% or 5.9%.

Over time, we are much more focused on partnering with the right providers and owning the right real estate.

Makes sense.

Then I'll just sneak one last one in.

The balance sheet flexibility that Scott Estes was talking about, has that changed?

Or that preference for delevering after significant investments, is that a function of what you think is coming in the future?

I.e.

do you think that the environment is right for larger acquisitions and you need to be more prepared today?

Or is that just simplistically we want to maintain lowest cost of capital under any environment?

Josh, really more of the latter.

I think we feel good about where the balance sheet is today.

I think the other way you could ask that question is: do you think leverage goes back up from here?

And I think no.

I don't think we need to push it down a lot more, but I think there is a noticeable difference from where we were and it gives us the flexibility to access really both the equity or debt market in the future, depending how the volumes play out.

Yes, it's all about passing on the lowest cost of capital to our operating partners.

That's our covenant with them.

So we really pay close attention to our balance sheet, and we want to make it as strong as possible so it gives us the most flexibility.

Okay.

Thanks, guys.

Jordan Sadler, KeyBanc Capital Markets.

Thank you, good morning.

I wanted to ask you a question about the sale of the life science portfolio back to Forest City.

I'm curious what the motivation behind that sale was, be it the structure of the investment or the small exposure there, and just interest level in life science longer term.

This was an opportunistic acquisition for us when we made it.

It was a time when capital is quite constrained, and Forest City approached us.

It was an outstanding asset; we made the investment.

And today as I said, it was an opportunistic sale for us.

We think it's a tremendous return.

It's a great strategic asset for Forest City to own, as they change their business platform a bit.

And I would caution anybody to not read into it as we are not interested in the life sciences sector.

It's just that this asset was an opportunistic acquisition and an opportunistic sale.

Okay.

Just as a follow-up there, so it sounds like you do have longer-term interest in the life science market.

I'm just curious.

When I looked at it -- and I'm reading some of your commentary in the release even vis-a-vis the Aspen deal -- it's just greater connectivity across the continuum of care.

Do you see --?

How do you view life science longer-term?

Does it really fit along the continuum of care?

We view life sciences as being an asset class that would be important to certain academic medical centers that we endeavor to do business with at some point in our history.

So as you establish a relationship with one of the major academic medical centers in the country, there may be life-sciences assets that they may need for a partner to own, manage, finance.

So we keep ourselves open in that respect.

We are not interested in broadly going out and building a portfolio in life sciences really outside of what we might do with an academic medical system.

Okay.

Then separately to Scott on the balance sheet, I'm curious.

What's the target ultimately in terms of cost of capital, credit rating?

I know you guys are -- I think you are BBB; S&P Baa2.

Is there a stronger target ultimately there to continue to drive that cost down?

Sure, I think we're moving in the right direction and there are opportunities, and it's important to us to make sure the agencies take time to come to Toledo and learn how we run the Company.

They have been doing that, which is great.

So we are optimistic.

We can hope -- moving in the right direction and I think maintaining the leverage and credit metrics where they are right now, combined with the quality of the portfolio and our ability to watch it and monitor it and have great people in place, I think we have great potential to move up another notch or two.

Okay, thank you.

John Kim, BMO Capital Markets.

Good morning, thank you.

A couple questions on dispositions.

In the past six months you have completely exited CCRC and life-sciences and have also reduced your Medicaid-related exposure.

Can you just update us on what your current view is on skilled nursing facilities?

I think we all might have a comment on this.

I would say that our view on skilled nursing is -- you know we have really tried to exit the long-term-care low-quality mix skilled nursing business.

We think that the risks associated with that business may not reward one for the marginally higher cap rate that you could acquire assets in that space.

So given the way we run our business, we just don't see that as being a critical component of what we do.

Where we are focused is in the high-quality mix, private-pay, Medicare, post-acute market, which we think is the future of rehabilitative care, residential rehabilitative care in the US.

So that's why we've gotten rid of most of those assets over the last five years that were in our portfolio.

Scott?

The only thing I would add is that the modern post-acute buildings are still generating about $400 million of investment volume a year for us through the Mainstreet partnership.

Those are all acquisition of brand-new buildings with providers that we want to do business with, like Genesis and Ensign.

So we like that business.

The yields are good, and I think the fundamentals of the business are good.

But as far as exiting some of the older assets in skilled nursing, it sounds like it's going to be more piecemeal?

Or would you take a bigger swing as far as the spinoff of this portfolio?

We already done it.

We've accomplished that.

We have -- and there are some of those assets that make sense for us, that we have in our portfolio today, and it's not a big number.

So there's no reason for us to be thinking of doing any kind of a larger portfolio sale.

Okay.

You've also reduced the average age of your portfolio by about one year in just the last three months, which is not an easy feat given the size of your portfolio.

Is there a particular range that you are comfortable managing this figure?

Younger is always better.

It's less CapEx.

You tend to have a more modern floorplan.

But the key question for us is always: Who is the prior owner and how much money did they invest?

That is an important question that maybe the age of the building doesn't always reflect.

Equally important is: Where is the building located?

If you are in a high-quality location in Toronto or London, it's okay to own an old building.

It is almost irreplaceable real estate.

And as long as it has been maintained, that can be a very profitable building.

We have a lot of those.

But it's different if you are in a rural secondary market with a 30-year-old building.

Those are the types that I think are really challenging to own.

Okay, that makes sense.

Then finally you probably didn't have time to listen to it this morning, but Genesis HealthCare discussed a new initiative, entering China.

Can you just remind us what your appetite is for Asia?

And if some of your partners venture out there, does that make it more appealing to you to potentially work with them out there?

We have so much on our plate in the US, Canada, and the UK, it's hard for us to really be thinking about places as far away as Asia.

So I would say Asia today does not fit prominently on our radar screen.

But we pay attention to what's happening over there.

I have been over to Asia, and I can tell you that -- well, there are even healthcare REITs in Japan.

So there is a need for what we do there.

But today is it where we are focused?

I would say no.

Got it; thank you.

Tayo Okusanya, Jefferies.

This is actually George on for Tayo.

Just wanted to get your view on the recent CMS proposed changes for reimbursement in 2016 across the board.

Was there anything that was vastly different from your expectations, and what you think the impact on operators will be?

On balance we think it's positive.

But because we are largely a private-pay company, it doesn't dramatically affect our business.

Okay, thanks.

Then just on the acquisition environment in terms of what you are seeing out there from potential larger deals, or everyone talks about the potential Brookdale portfolios coming on or being available.

What you seeing in terms of larger portfolios out there?

There's plenty of activity.

We have passed on at least $10 billion of acquisitions in the last couple of quarters.

We were fortunate to have the lowest cost of capital in the sector, which means that if we want the deal we can get it.

But we have passed on a lot of them.

They continue to be available.

There are a lot of people looking to make those investments.

We are focused on our partners in the high-quality assets.

They tend to be off-market.

So we look at all the big strategic things and every once in a while one makes sense.

And we have the ability to win those.

Ones you've passed on, has it been more an asset quality or a pricing issue?

It's more -- it's both but it's primarily asset quality.

I guess at the right price you would consider owning the lower-quality assets; but that's really not our model.

Okay.

Thanks, guys.

Vikram Malhotra, Morgan Stanley.

Thank you.

Just on the RIDEA portfolio, for the guidance or the estimate in the second quarter, would you expect the US to trend similarly -- I think it was 5% or so in the first quarter -- and there to be maybe a downtick in the UK?

Or is the mix going to be different?

Yes, the US was strong in the first quarter despite a challenging winter in New England and the Mid-Atlantic.

So we had 5%-plus growth in the RIDEA portfolio nationwide US.

UK was down almost 4%.

And that's because death-related moveouts were up more than 125%.

I mean, it was highly unusual.

That is starting to bounce back.

Moveins have continued to be really strong in the UK, and the moveout activity fortunately has stabilized.

So you will start to see that pick up again, Vik.

The first quarter was unusually bad in the UK.

Okay.

Then any interesting differences that you may have seen between IL and AL in the RIDEA portfolio?

I remember you give us a statistic a while ago on just the growth in markets where you are seeing construction.

Do you have that statistic?

I think there are two questions there.

We haven't seen a material change between IL and AL; and our portfolio is pretty equally balanced between the two.

I think that was your first question.

Then the second one in terms of new supply in our markets, it hasn't really changed in the past two years.

It has been pretty flat.

Okay.

Then just last one on the medical office side, I guess in prior conversations it seems like there's a nice mix between on-campus and then off-campus affiliated.

It seems like you prefer the off-campus affiliated maybe a bit more than your peers.

I'm just wondering, how do you see that model evolving?

Is there much more of a move towards off-campus whereas -- and the off-campus affiliated?

And therefore the economics in terms of pricing just may be very similar today?

Well, we like both.

We don't like is off-campus that is not affiliated with the health system.

Those are the MOBs that we really don't pursue at all.

They make up a very, very small percentage of our total portfolio.

But we are happy to own on-campus properties as long as it's a good health system and a hospital that is flourishing and gaining market share.

But you're right; a lot of the new construction today is off-campus.

And that's because that's where the people live.

People want convenience.

They want low cost, and that means building new properties in the suburbs, where the wealthy people live and where there's job growth and people are moving.

So when you look at the newer assets that we're either buying or developing, they tend to be located off-campus just because that's where healthcare is moving.

That is where these hospitals are increasingly delivering care.

Vik, A lot of it goes to the whole hub-and-spoke strategy that many of the premier hospitals are trying to build now.

So how do you drive population to the core acute-care hospital that is often in an urban location?

So many of the major hospital systems in the country are focused on developing good-quality outpatient medical outside of the core market in order to drive traffic, drive population into the beds in the core.

And we want to be part of that.

That's great.

Thank you, guys.

Daniel Bernstein, Stifel.

Good morning.

I guess I have a question on -- we haven't heard in a long time you talking about maybe vertical integration between --collaboration between your operators.

We've seen a lot of assisted-living companies buy skilled nursing, and skilled nursing buy assisted living, and even some vertical integration now in the post-acute and hospital sector, people moving up and down acuity.

So one, what do you think about the opportunities for consolidation in healthcare in terms of vertical integration, how that might bring you some real estate?

Then two, if you can go back over how your operators might be collaborating together to improve their operating performance.

Maybe I will start with the last one.

I think we are in early days of operators collaborating.

I think we always point people to Voorhees, New Jersey, because it is an example: if you speak to Genesis, you speak to Virtua, you speak to Brandywine, they will all say that their performance is better because of their location adjacent to each other and the communication that they've established.

We think connectivity is the future of healthcare delivery, and it's one of the reasons why we are excited by the hospital acquisition we made in London.

We have a big investment in London.

We think it's among the very best markets in the world where you could have a concentration of real estate assets.

And we believe that creating connectivity between our elder-care network and those acute-care hospitals is going to drive better performance.

We have seen it here in the US.

But, Dan, it is early days in this.

Typically hospitals saw themselves as the beginning and end of healthcare delivery.

And we are encouraged by the dialogues we have with major hospital systems that they are moving away from that view; that they know they have to work with the post-acute and senior-housing operators in their catchment areas.

But it's early days.

Scott, do you want to comment on any kind of merger activity you think or combinations in the space?

Even though we never comment on M&A.

I didn't want to comment on specific merger, but just the idea of vertical integration.

No, Dan, I think that's the right summary.

The important point is that we are partnering with the leading providers across the continuum, and it makes a great deal of sense for them to work together.

Because no one company is going to be able to do everything, and that's just the reality of the way the health system is evolving is it's going to be critical to perform partnerships among providers to deliver great care.

But that is where healthcare is going and that's how we are shaping our investment strategy.

Yes.

We're not aware of anybody thinking about a move towards vertical integration, that they should be -- I think it's really the opposite of that, Dan.

Okay.

Then in terms of -- going back to that hospital acquisition the Aspen in the UK, were you interested in that property before Tenet was going to acquire that?

Or knowing that Tenet was going to be one of the tenants or new -- I don't know if they're already in the portfolio, but a bigger relationship for you, was that part of the attractiveness of your portfolio?

And do you think there's any additional opportunities with Tenet, whether it's domestic or foreign, to partner up with them?

Dan, John Goodey, who runs our London office, has had a long relationship with the Aspen Hospital Group in London.

So he has been speaking -- he's had a relationship with [Mark Hawkes], who ran that for many, many years.

So this has been on our radar screen for a long time.

We have -- HCN has a close relationship with Welsh Carson.

So this is something we have been circling long before we ever knew that Tenet was going to be involved here, and we think that is a positive.

We already have, what is it, Scott, about $1 billion of --?

It's the sponsoring health system on 19 of our middle office properties in the US.

It's 1 million square feet.

1 million square feet, not $1 billion.

1 million square feet with Tenet today, and we would like to think this is going to draw us closer together with Tenet.

We see Tenet as a growing acute-care hospital company, and I would hope that there are lots of things we can do together in the future.

Okay.

Then I really haven't heard anybody ask you about cap rates, where that's heading for the different asset classes.

My impression has been that cap rates have been decreasing through the year so far.

Is that the same impression you are getting when you are bidding for assets and buying assets at this point?

Yes, that has been the trend in the last six months, Dan, for sure.

Maybe that slows down, now that the Treasury is up a bit and some of the healthcare REIT stock prices have come down a bit.

But what might counterbalance that is that the big institutions that haven't historically looked at our space are starting to look pretty closely.

I'm talking about foreign pension funds and insurance companies in particular, that have a lot of money and aren't scared away by low yields.

Healthcare real estate still looks really attractive by comparison, and those are the world's biggest investors.

That is where a lot of the wealth resides.

So if they start coming into our business in a major way you're going to see property values escalate.

That's great color.

I appreciate it.

I will get back in the queue.

Thanks.

Todd Stender, Wells Fargo.

Thanks.

Just back to the Aspen deal, how much of the 6.3% initial lease yield that you are getting on the deal already reflects that Tenet is going likely going to be the new operator in a few months?

Just trying to see how much yield compression could be expected (technical difficulty) Tenet takes over.

Not sure I understand the question, Todd.

Can you restate it?

Sure.

You are locking in a 6.3% initial lease yield I think on the Aspen Hospital deal.

Yes.

Does that already reflect that Tenet is going to be the new operator in a few months?

I mean, would it have been a 7% yield if it was just Aspen with no projected acquisition?

I'm got to tell you that the cap rate was -- Aspen is a great operator and Tenet is a great operator, and this is extraordinary real estate.

So the cap rate was set independent of Tenet.

They were not -- when we negotiated the initial -- when we negotiated this transaction, Tenet was not in the picture.

It happened later.

And had it come to market today with Tenet being the operator, perhaps people might have put a premium on it.

But understand, these have been extremely well run and there's been lots of investment on Aspen.

Welsh Carson has invested lots of money in these assets.

When you go see them, Todd, you will be impressed.

You would be very happy to spend -- to either have a day surgery at one of these hospitals or spend the night if you had to in one of these hospitals.

They are really extraordinary assets in extraordinary locations.

The cap rate reflects that.

Okay, and thank you, Tom.

It was to see if once Tenet takes over, should we expect this to be in your balance sheet -- or call it a market cap rate of a 6%?

I mean is there value creation here the minute Tenet takes over?

I would say that we haven't really thought about it like that.

We think that we paid a good price for these assets, and I think they will become more valuable as we connect them to our other healthcare assets in London.

I think that will make them more valuable, certainly.

Okay, that's helpful.

Then Scott Estes, just to focus on your comments from the improving balance sheet metrics, is there any mortgage debt that is going to come off the balance sheet because of the $1 billion in dispositions?

And was any -- did the Fitch upgrade, the BBB+ factor in the $1 billion of acquisitions?

First question is secured debt as a part of the payoffs.

What was it, guys?

$174 million in secured debt that will come off as a part of the Forest City disposition.

And what was the second question again, Todd?

Did the Fitch upgrade factor in this level of dispositions?

No, no.

As Tom said, that was really an opportunistic decision in terms of the case of Forest City, and we are always looking at the balance sheet from a bigger-picture perspective.

We like to keep secured debt low, in the 10% range; and when we acquire assets that have some debt on it, we like to have that availability and then try to pay it off as soon as we are able to.

Great, thank you.

(Operator Instructions) Juan Sanabria, Bank of America.

Thanks for the time.

Just wondering if you could speak to any opportunities you guys may see to partner with sovereign, pension, or insurance companies, noting that they are significantly more interested in the space than they have been historically, and what kind of fees you may be able to generate, and maybe what kind of assets they are most interested in.

Juan, we have greatly expanded dialogues and established some relationships with some of the sovereign wealth, larger pension funds, and the usual suspects you would expect us to.

And we have made great headway there.

Many of them have visited us here in Toledo and have done significant due diligence about investing with Health Care REIT.

I think that they have all been very happy with what they've seen.

As you can imagine, they would be most interested in the types of assets that we are interested in, which are often in major metropolitan markets.

And I would say that outpatient medical is the most easy asset class for them to get their hands around, so if you were to see any kind of joint venture investment with those types of names, it would likely be in the outpatient medical space.

Okay.

What kind of fees do you think you could generate?

What value do you provide them, for them to --?

Juan that remains to be seen.

I think that where we would be helpful to them -- because as you know, they are not invested in the space, so they would be leveraging our expertise.

Whereas they don't need, if they are investing in central business district office with a REIT they would perhaps need less of their expertise, because they have been invested in that asset class for many -- for decades.

So we expect that there's some level of fees that we would be able to capture.

But mostly associated with, if it were in the outpatient medical space, with the fact that we have a medical office management company.

So that's an area that -- that is a value component that we bring to the mix when we enter into such a joint venture.

Great; thanks.

Then just one more for me on the hospital side.

Obviously you guys seem to be very focused on the gateway global cities.

But do you have any interest in dominant hospitals in other top CBD or maybe even secondary markets outside of UK, London, New York?

Yes, historically Juan, those hospitals that we would be interested in have very low-cost access to capital.

What we're hoping with some of those systems is that at some point they may look to partner with us in their other real estate assets, not necessarily their hospital, but perhaps their outpatient assets, which most of them continue to own and manage internally.

So I would say that is what we are more focused on.

If we could own some of those hospitals that certainly would be something we might be interested in.

But again any interest we have in acute care would be in line with what we are articulating, which is we want to be in the major markets in the US, Canada, and the UK.

We are not really interested in secondary cities and tertiary markets, particularly to own acute-care in those types of markets.

Thank you.

Rich Anderson, Mizuho Securities.

Thanks and good morning.

When a new movie comes out and Angelina Jolie is asked to talk about it, it has usually happened like two or three years ago, and so she has to remember everything about the movie.

Is that -- sorry for the weird analogy, but is that how it works with you?

Like how long does it typically take to start a conversation to something actually getting closed?

And is that time frame extending lately?

Are you asking with relation to Aspen Hospitals?

Aspen is the one that comes to mind, but generally.

I would say that discussions with Aspen Hospitals started to move along probably seven months ago.

You've got to understand, Rich, John has had a continuing dialogue with Aspen, with the London team for Aspen for a lot of years.

So this was not something that happened overnight.

This was not something that came through a broker.

This is something that came out of a relationship.

You also have to know that Scott Estes has a very close relationship with Welsh Carson.

So there are reasons why this -- why we end up owning this.

This is something that everyone in healthcare real estate would've loved to have owned these assets.

But we own them.

Okay.

As a general statement though, would you say it's taking longer to -- when you start circling something for ultimately to get done?

Or is that not --?

I would say no.

I'd say -- remember that so many of our operators -- again you have to come back to so much of our new investment growth is coming from our existing operators.

Correct, yes.

And it is a matter of when it makes sense for them essentially to transfer that ownership to us.

Rich, that's right.

When I look at say the Rivera portfolio that we bought, it's a $650 million joint venture; we owned 75%.

We've been talking to them since early 2012.

We knew the assets were coming.

The Benchmark investment in New England, $360 million, similar timeline.

Four years of discussion.

So there are a lot of other properties out there that we know will come at some point.

And as Tom mentioned it's a matter of the right timing.

We're happy to be patient.

Rich, if Angelina Jolie or any one of her children got sick when she was making a movie in London, I can assure you she'd be very happy to bring them to Parkside Hospital.

Well, you got me all pumped up.

I'm going to go to London, break my arm, and have surgery.

So on the topic of Vantage, which I enjoyed the presentation when I was able to see it firsthand, Archstone-Smith, a multifamily REIT from a long time ago, developed Revenue Management LRO with a partner; and then they ended up selling it to their competition on the view that rising tides lift all boats.

Have you given any thought to that?

Or are you going to keep that to yourself?

Yes, Rich, I would say that senior housing is still in the early phases of its evolution in professionalization at that level.

They are excellent at providing care, which is why the business is so successful.

There is great demand for the product.

But in terms of sophistication in things like revenue management, it is still very, very early.

I think there's great opportunity.

It's one thing that makes the business so exciting, is that it's doing well even though we think there is a lot of room for improvement.

Okay.

Then lastly, how expensive is it and time-consuming to change the Company's name?

I know we've talked about it in the past.

But you are so much more than Health Care REIT in the minds I think of most people.

Have you given that any thought?

We have, Rich, and it's actually built into our G&A for this year and we are -- stay tuned on that.

All right, great.

But I'm going to tell you one thing, Rich, it's not going to be called Health Connections Network.

Okay, that's your loss.

Thank you.

That will conclude today's Health Care REIT first-quarter 2015 earnings conference call.

We appreciate your participation.

You may now disconnect.

Thank you.