Welltower Inc. (WELL) Q1 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Health Care REIT earnings conference call. My name is Bee, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

Thank you, Bee. Good morning, everyone, and thank you for joining us today for Health Care REIT's First Quarter 2011 Conference Call. If you did not receive a copy of the news release distributed this morning, you may access it via the company's website at hcreit.com. We are holding a live webcast of today's call, which may be accessed through the company's website as well. Certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the new release and from time to time in the company's filings with the SEC. I would like to now turn it over to George Chapman, Chairman, CEO and President of Health Care REIT, for his opening remarks. George?

Thank you, Jeff. Good morning. We are pleased to report that Health Care REIT experienced a strong first quarter in 2011. Through the execution of our disciplined relationship investment strategy, we generated a 12% first quarter return for our shareholders and remain on target to deliver outstanding 2011 earnings growth of 8% to 11%. The investments we closed in 2010 and year-to-date 2011 provide a foundation for strong future earnings growth. The key drivers of this earnings growth include internal NOI growth generated through our core portfolio rent increases and RIDEA partnership NOI growth. Our RIDEA investments are performing in line with budget through the first quarter and remain on target to generate an average of 5% annual NOI growth over the next several years. In addition, our investment pipeline remains strong, providing embedded growth opportunities through disciplined acquisitions driven by our existing partner base. We will continue this disciplined growth profile going forward. In 2011 to date, we completed nearly $4 billion in gross investments, including transactions with Genesis HealthCare, Benchmark Senior Living, Silverado Senior Living and Capital Senior Living. We completed the closings of these portfolios on or ahead of schedule, which allowed us to raise our 2011 FFO guidance by $0.07 as these transactions will be immediately accretive to our earnings. Health Care REIT's unprecedented investment growth of $4 billion in 2011 builds upon the momentum of a $3.2 billion of investments in 2010. This extraordinary period of investment growth demonstrates the successful execution of our relationship investment strategy and will generate solid earnings and dividend growth over the next several years. By investing in industry relationships for over 40 years and providing a full service value add business platform, Health Care REIT has earned a reputation as a long-term partner of choice. During this unparalleled period of opportunity and growth, we continue to strengthen and reposition our portfolio to capture investments that reflect emerging industry trends in the evolving senior housing and health care environment. We are deploying capital, disposing of assets and deepening our management team in order to capitalize on the opportunities created through this period of change. We are staying ahead of the curve in the way we evaluate asset quality, using a comprehensive matrix that considers the quality of asset in its entirety, including the physical asset, the strength of operations, clinical quality, referral networks and strategic geographic considerations. This comprehensive approach to capital deployment is resulting in long-term consistent returns for shareholders. Now, let me take a moment and comment on the recent announcement by CMS regarding the proposed adjustment in payment rates for skilled nursing facilities in 2012. The proposals presented by CMS are preliminary and will go through a significant period of discussion. The proposals will not materially affect Health Care REIT's payment risk, and we also believe the end result will consider the interest of all stakeholders and likely be phased in over a period of several years. Our current $1.2 billion skilled nursing portfolio as of March 31 had very strong rent coverage of 2.3x. Pro forma for Genesis, the coverage would have been a bit over 2x. These coverage levels are the strongest in our sector and have increased over 20 to 30 basis points over the last 5 years. Additionally, 99% plus of our skilled nursing portfolio has a rent payment coverage of approximately 1.7x. You should note that in anticipation of the RUGs-IV payment rate adjustments, we conservatively underwrote the Genesis portfolio at approximately 2x coverage, using a payment rate below the current RUGs-IV rates. I should also point out that our industry-leading operators have proven adept at managing through reimbursement changes by strategically adjusting their business models and consistently managing costs. Our operators' active management, together with our strong portfolio diversification coverage and systems, have resulted in consistent performance through many economic and reimbursement cycles. And we remain optimistic that we will continue to successfully lead the company through these and other challenges and opportunities presented by an evolving healthcare environment. Through our active portfolio management approach, our company has successfully managed and grown our triple-net lease portfolio for decades. We also actively manage and operate approximately 9 million square feet of medical office buildings across the United States. We are now applying the same portfolio management discipline and experience to our expanded RIDEA operating partnerships, and we have built a customer-focused business platform to manage our portfolio of relationships. Our relationship managers are tasked with driving NOI growth in our RIDEA portfolio, as well as growth in our triple-net lease portfolio. In addition, they serve as facilitators of best practice sharing and potential synergy and development across our operator provider and tenant base. In fact, on May 18 of this year, we will be holding our first executive forum for the executives of our operating portfolio of partnerships to begin this process. This is an exciting period of opportunity and growth for Health Care REIT. We are looking forward to our first annual investor day to be held at our corporate headquarters in Toledo, Ohio, on May 19. Our Investor Day will provide a forum to meet and interact with many levels of our management team and the executives of some of our key portfolio partnerships. Participants will also gain insight into Health Care REIT's business strategy, portfolio quality, industry-leading capabilities and vision for the future. I should again mention that so far, attendance has been terrific, and we would encourage those of you who haven't made a commitment to attend to do so. It would be surely a great day. And with that, I will now turn the forum over to Scott Estes, our CFO for REIT financial and portfolio overview. Scott?

Thank you, George. Good morning, everybody. As George discussed, we had a very successful first quarter and are off to a great start to 2011. Through early April, we have completed nearly $4 billion of new investments. These investments have been entirely prefinanced with attractively priced debt and equity capital and are immediately accretive to earnings. Most importantly, we believe these investments have positioned us for very meaningful earnings growth over the remaining 3 quarters of the year, enabling us to generate expected FFO and FAD per share growth in a high-single digits or better for the full year. We also ended the quarter in a great balance sheet position, having financed all the deals announced year-to-date without any significant changes to our credit metrics. As of today, we have our entire $1.15 billion line of credit available, plus an additional $200 million of cash available. Our first quarter performance was perhaps our strongest ever, with same-store NOI increasing between 3.4% and 3.8% across all of our reported asset categories, while our RIDEA and Life Science portfolios performed at or above our expectations for the quarter. Our expectation for accelerating earnings growth over the next several years recently allowed us to increase our dividend by 5% versus the comparable quarter last year, while still positioning us to lower our FFO payout ratio to 80% or below by as early as 2012. Turning now to the details, first regarding our investment activity, we completed $1.4 billion of gross investments during the first quarter and nearly $4 billion year-to-date. The vast majority of these investments were announced throughout the first quarter, including our partnerships with Silverado Senior Living, Benchmark Senior Living, Genesis HealthCare and Capital Senior Living. We also acquired 7 senior housing assets in the first quarter for an aggregate $113 million, with an average initial rental yield in excess of 8%. All of these investments were brought to us through relationships with our existing operators. And finally, we did sell 2 smaller Senior Housing portfolios for $44 million, generating $26 million in gains. Turning now to the portfolio performance. First, our stable triple net Senior Housing and Care portfolio continues to perform quite well. Senior housing payment coverage increased 1 basis point to 1.55x and occupancy remains strong at 88%. Skilled Nursing also remained strong, with payment coverage increasing 2 basis points to 2.38x and current occupancy stood at 85%. We also generated strong same-store cash NOI growth rates within both the Senior Housing and Skilled Nursing portfolios during the first quarter. Same-store Senior Housing NOI increased 3.5% versus last year, while our same-store Skilled Nursing NOI rose 3.4% year-over-year. Next I'd like to take a minute to discuss our Senior Housing operating portfolio, which is comprised of our RIDEA partnerships. As of March 31, the operating portfolio represented $2.2 billion or approximately 22% of the total portfolio. First quarter results include a full quarter of performance for Merrill Gardens, Senior Star and Silverado, while the Benchmark portfolio performance is only included for the last 4 days of the quarter. Including the investments completed subsequent to quarter end, our RIDEA partnerships make up approximately 17% of the total portfolio investment balance. As you can see in the supplement, the blended occupancy across our 4 operating portfolios is 89.8% as of March 31. And with a portion of both the Silverado and Senior Star portfolio still [indiscernible], we believe our operating portfolio occupancy has room to increase over the next several years, providing a source of increasing NOI and earnings growth. As George mentioned, first quarter results added to the operating portfolio were almost exactly in line with underwritten expectations. And as we mentioned last quarter, we continue to expect the operating portfolio to generate average NOI growth of 5% or better over the next several years. Moving on to the Medical Facilities portfolio, first in regard to our Hospital portfolio, first quarter stable payment coverage remains strong at 2.6x. We again experienced solid 3.5% same-store NOI growth in our Hospital portfolio during the first quarter versus last year. Our Medical Office portfolio also had another strong quarter, with occupancy at 93% and trailing 12-months retention of nearly 80%. We also generated excellent same-store growth as first quarter same-store cash NOI increased 3.8% year-over-year, exceeding our internal projections and was actually the highest same-store quarterly NOI growth since we began investing in medical facilities 5 years ago. Our Life Science portfolio also continues to perform better than initial underwritten expectations. Our lease renewal activity continues to be very encouraging as the first 2 leases which roll over this year had been renewed at rates approximately 40% above current rates. As a result, we are increasingly confident that we will meet or exceed our long-term NOI growth expectation at 5% or better in our Life Science portfolio. Turning now to financial results, we reported normalized FFO per share of $0.70 and normalized FAD per share of $0.62 for the quarter. First quarter earnings included $0.08 per share of capital carrying cost as a direct result of [indiscernible] raising $3.5 billion of capital in early March, most all of which remained in cash on the balance sheet for the remainder of the quarter. Other cash was promptly deployed to fund the $890 million Benchmark and $2.4 billion Genesis transactions that closed on March 28 and April 1, respectively. I think importantly, the ability to close all of our major transactions on or ahead of schedule positions us for a very significant quarterly growth throughout the remaining 3 quarters of the year. Our G&A expense was $17.6 million for the first quarter, which included $3.9 million of accelerated expensing of stock and options for certain employees and directors, which normally occurs in the first quarter. And for the remaining 3 quarters of the year, we would expect a G&A run rate of approximately $16 million. Regarding our dividends, we recently declared the 160th consecutive quarterly cash dividends for the quarter ended March 31 at $0.715 per share, representing a 5.1% increase over the same period last year and an annualized rate of $2.86. In terms of our capital activity, as previously announced, we successfully raised $3.5 billion of equity in unsecured debt capital in March, which enabled us to fund our unprecedented acquisition volume thus far in 2011. We also issued 574,000 shares under our Dividend Reinvestment Program at an average net price slightly above $48 per share, generating $28 million in proceeds. And no shares were issued under our equity shelf program during the quarter. Next, I'd like to take a minute to discuss our current liquidity position. As I mentioned, we raised $3.5 billion of capital during the first quarter, generating sufficient proceeds to pay for all of the investments announced year-to-date. The recent debt offering extended our average debt maturity to 10 years. And as a result of this capital activity as of March 31, our cash balance stood at $2.7 billion. After paying for the $2.4 billion Genesis transaction and the $141 million Capital Senior Living transaction, which included $48 million of assumed debt that closed subsequent to quarter end, we currently have a pro forma cash balance of approximately $200 million. In addition to this surplus, as previously mentioned, we have our full $1.15 billion line of credit available. We have started the process of renewing our bank lines and hope to increase our line of credit capacity to between $1.5 billion and $2 billion by the end of summer. And as a result, I think we're in an excellent capital position and note that the increase in our line of credit would provide important flexibility to allow us to come to market to raise permanent capital less frequently than we have in the past. Turning to our credit profile, we remain comfortable with our current debt to underappreciated book capitalization of 44.6% and our secured debt to total assets of 12.9%. Our interest and fixed charge coverage of 3.1x and 2.6x, respectively, are slightly lower than our historical average [indiscernible] circumstance of raising $3.5 billion of capital that was not deployed until the end of the quarter. Over the next quarter or so, we would anticipate our interest in fixed charge coverage to move back to their historical averages of approximately 3.5x and 3x, respectively. In addition, we will look to move leverage down from current levels over time. And more specifically, looking to move debt to underappreciated book cap down closer to the 40% level from the current 45%, and to maintain net debt to EBITDA at 6x or below. Finally, I'll just take a moment to review our updated 2011 guidance and assumptions. We do remain comfortable with our most recent earnings guidance, which increased 2011 normalized FFO to a range of $3.32 to $3.42 per diluted share, representing strong 8% to 11% growth over 2010 results. Our 2011 FAD expectations remain unchanged at a rate of $3.01 to $3.11 per diluted share, representing 6% to 10% growth over the last year. I would like to take a brief moment to give you some additional perspective regarding our earnings per share over the next 3 quarters. By simply adding a full quarter's impact of the Genesis and Benchmark acquisitions and a full quarter's impact of our March capital activity, we are positioned to generate very strong normalized FFO and cash growth over the remaining 3 quarters of the year prior to the benefit of any additional investments, which may occur. More specifically, our second quarter earnings run rate in terms of normalized FFO is currently in excess of $0.85 per share. As we mentioned last quarter, our investment guidance does not include any investments beyond what has been announced at this time. So as a result of what has been completed year-to-date, we've increased our net investment guidance from the previous $1.2 billion to $3.7 billion. Our growth acquisition guidance of $4 billion represents an increase of $2.5 billion, which is primarily comprised of the $2.4 billion Genesis acquisition and $130 million of additional investments completed in the first quarter. Finally, we do continue to expect dispositions of approximately $300 million for the full year. With that, operator, that concludes my prepared remarks. And we'd like to now open the call for questions, please.

[Operator Instructions] And we do have a question from Jana Galan of Bank of America.

I was wondering if maybe we could get a little bit more color around that potential CMS Medicare [indiscernible] and are there any individual tenants that you could see potentially bumping along your coverage ratios?

It's Scott. I'd like to provide a little more color for you and everyone. I think we've seen our portfolio in the industry manage through reimbursement cycles many times. That is why we do underwrite specific coverages of about 2x our Skilled Nursing portfolio. And I would note that our portfolio coverage is actually up about 20 to 30 basis points over the last 4 or 5 years. I think including -- or thinking about the impact of what was announced, the decision, in our opinion, to issue 2 proposals by CMS signals, I think, the need to discuss and acknowledges the meaningful uncertainty of only using 3 months of preliminary data. As a result, we're probably in the camp of most people where we think the most likely outcome will be similar between the positive 1.5% to the 11.3% reduction and potentially be baked in over a period of time. In the past, I think one main point is in our current portfolio, it actually doesn't reflect the full impact of the RUGs-IV benefit. And as we've looked at our portfolio and even some of the public companies have started to report generally you've seen Medicare rates up 10% to 15% per day. So we have not even seen that impact in our coverages. So even if we think about coverages, which again are very strong at 2.4x currently, those are the key numbers you can start from and don't even yet reflect the full benefit. And the one thing I might clarify, too, from George's comments, we actually did look at the stratification of our existing portfolio, and we found out that 99% of our operators within our portfolio cover in excess of 1.7x.

That's very helpful. And does it change your thinking at all about the Genesis operating exposure option that you have? Being that this is likely to be a continued issue?

Well, we look at this as a triple-net lease investment to begin with, with the opportunity to benefit at some appropriate time as a result of our option. And now there's another overview comment I'd add to Scott's and that is that over the years -- over our 42-year history doing skilled nursing, skilled nursing has always been a very cost-effective platform, probably the most cost-effective efficient platform in healthcare. And while the approach or the services have changed a bit, we certainly move to much higher acuity customers, folks that used to be in hospitals, we've also moved to shorter lengths of stay, which has maintained the reputation of skilled nursing as a very cost-effective way to deliver necessary care. So I really would add -- my general comment would be that we really think the enhanced collaboration between the operators and CMS and the others and working off common data that they will drive should lead to a very palatable final rule.

Your next question comes from James Milam of Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P.: I just want to add one more question on the Genesis underwriting. And I was just wondering if you guys could give us a little more color on some of the sensitivities you ran and I guess where coverage would go if RUGs-IV in effect weren't implemented, so under a RUGs-III methodology? And then also how you guys look at the growth of that portfolio if for example the worst case scenario were to come to pass where the full reduction were implemented? And I guess finally maybe just talk about if the full reduction is implemented, what you think that could do to pricing for acquisitions in the SNF [skilled nursing facility] market?

I'll start and then I'm going to turn this over to Scott Brinker who’s in charge of our underwriting team. Generally, when George Hager and our group did this deal, our goal was to move up to after management fee coverages of 2:1, okay? So we think we have significant upside in this portfolio, and we'll do very well regardless of the outcome of these proposed rules. We also think we have a lot of opportunity with George, in general, to add to his platform, make it even more cost effective. In terms of pricing of additional acquisitions, perhaps there will be some effect. But we're going to have to wait a bit until we see what the final rules are. Scott, do you want to comment generally on underwriting?

Yes, I'm happy to. This is Scott Brinker. We underwrote the transaction to sort of a hybrid between the rates that had been in place in 2010 and what potentially would be in place under RUGs-IV. And that's really the 1.5 coverage that we had given to the public. It's unlikely that rates will decline by the amount that's been released by CMS. But nonetheless, we think rates will at least be at a minimum what they had done prior to the ruling. So coverage in the 1.2 to 1.3 range to us is sort of the low end of expectations. Genesis has been very successful over the years in managing through reimbursement cycles. And we would expect them to do the same here.

If I could add, too, Scott. This is Scott Estes. And we did speak with George Hager over the weekend, and Scott has been taking about the changes. I like to point out, you're right that specifically a worst-case scenario ignores their ability to lower cost, which I know they're thinking about. And it also, I think more importantly, ignores their ability to increase quality mix over time. As we talked about, we're looking for about 55% quality mix this year, but the ability to expand to the mid 60s over the next five years or so as we've talked to many of you about is I think much more important and speaks to George Chapman's comments about why we're comfortable with [indiscernible] about upside in terms of coverage in that portfolio. James Milam - Sandler O'Neill + Partners, L.P.: Okay, great. That's helpful. Can you guys also just talk a little bit about the dispositions you have left or planned for this year and what you're seeing and expecting in terms of timing and pricing on those?

Sure, James. I think $300 million probably is our best estimate at this point. It's a mix of generally skilled nursing assets, as well as some senior housing assets. I would say it looks to me that about $110 million of what has not happened yet is severed loans. And if I had to weigh the portfolio, it looks to me that about $150 million of it could actually happen in the second quarter. So it weighted earlier in the year from this point out. James Milam - Sandler O'Neill + Partners, L.P.: So the $150 million, does that -- that's in addition to the $50 million that was done in the first quarter?

Yes. I think it was $26 million in the first quarter or so. Probably $100 million a year or so in the second. And then you can model it evenly throughout the last 2. James Milam - Sandler O'Neill + Partners, L.P.: Okay, great. And then my last question, can you guys just talk about the Development portfolio just given the sense if everything is still on track and on time? And then maybe could you give us a little color on the Nashville development that we saw some press reports about? Just in terms of I guess what the plan is there and how that fits into the overall Health Care REIT strategy?

This is John Thomas. I'll start with the Nashville project. That is a development site. It’s adjacent to the ATA headquarters and HCA's flagship hospital there in Nashville where they are land constrained. We have an MOB there. And there's also a large physician practice facility on the location. So between Vanderbilt and some Life Sciences opportunities and other discussions in that market and the HCA campus opportunity, we had a kind of an inside track on the opportunity to purchase that. We will not develop that until leases are signed, as is our general practice, and we'll take a conservative approach to that. We're having very good discussions with a number of institutional tenants about the potential there. James Milam - Sandler O'Neill + Partners, L.P.: And the plan is to do healthcare-related facilities, not to do some mixed-use? It sounds like from the article mixed-use residential, retail, restaurant, et cetera but it's still going to be healthcare focused, is that correct?

It'll be our core competency of either healthcare, direct healthcare or life sciences, healthcare related to the academic opportunities in that market. The mixed-use development and other things is really the broader plan that the city has for that location. And the key driver of this was the mayor's plans and development of a bridge connecting that site to West End Avenue. So again, very optimistic and very good inside opportunity for us. But again, we will not move forward in the development until leases are signed and consistent with our normal conservative element of practices. As far as the rest of our development portfolio, we moved 3 projects to completion in the first quarter. One, Loma Linda University Medical Center physician office building a month early and 98% occupancy. We just -- we had the grand opening of that facility yesterday, but rents commenced in March. Other projects that are in the development right now are on time, on schedule, frankly moving ahead of schedule in most cases and in a very conservative high-occupancy fashion. James Milam - Sandler O'Neill + Partners, L.P.: Great. That's it for me.

Your next question comes from Rich Anderson of BMO Capital Markets.

Just first, is maybe -- I apologize, but maybe this is an ignorant question but I'm asking anyway. If you're talking about increasing the quality mix of Genesis, correct me if I'm wrong, but doesn't that kind of put you more in the crosshairs of the CMS proposal?

Well, Medicare would -- this is Scott Brinker speaking. Medicare would still be much more profitable than the other payer. So any improvement in mix would almost for certain improve payment coverage even in a worst case when a full 11% comp was enacted.

Okay so -- but from a growth perspective, it could be a negative. But anyway, I just wanted to make sure I understood that issue. The question I have and we're trying to work through our model is you're talking about a $0.39 annualized positive impact from Genesis, and you raised guidance by $0.07 at the end of the day, understanding there was capital raising and all the rest. Can you kind of walk through the specifics of how closing Genesis, when you did, which was very early on in the second quarter, why the actual accretive component to 2011 was so much lower than $0.39?

Sure. This is Scott. I think the best way to think about it is you're correct. We advertise an annualized impact of the Genesis deal at $0.39 FFO benefit and $0.29 just to ad. I think by closing the deal on April 1, the 3 quarters of the year would reduce the $0.39 and $0.29 to about $0.29 and $0.22, respectively. And then you would lower each of those numbers by about $0.22. And the net result has been in the $0.07 net [indiscernible] increase on FFO and maintaining that guidance flat. The components of the $0.22 by our estimation are the $0.08 of capital carrying costs from the capital we raised in March. And then probably that $0.12 from upsizing our deals basically by sitting here in a position where we have our line available and actually sitting on cash as opposed to having a little bit of borrowings on the line, probably about $400 million to $500 million difference makes a very big difference to the tune of giving us future earnings growth potential by having that whole line capacity available. But that would be relative to our previous guidance. So and -- and the other small piece was Capital Senior Living deal closed in April versus what we had originally estimated to be February. So I think that those are the pieces that should hopefully connect the dots for you.

Okay. Going back to Genesis, what would have been your coverage without the hybrid analysis but just RUGs-III?

Yes, Rich, this is Scott again. That's the number I had mentioned earlier, roughly 1.2x, 1.3x.

Okay. You called that the low end of expectations, but if I'm correct and maybe you can enlighten me, but the most draconian of scenarios, the 11-plus % decline would be worse on a net basis than RUGs-III would be, would it not?

It depends on the operator, but it would be pretty close in terms of per diem rates.

Rich, I'd like to comment, too. I think Scott made a -- the elder Scott, Scott Estes, made a very good point. And that is that all of these operators are very adept at responding to if not getting ahead of some of the new proposals or final rules. And George Hager and his team are already working on significant cost reductions as well. So I think we're going to adapt very well.

Okay. And then last question, can you comment about the situation with your net portfolio in terms of master leases and how you're kind of cross collateralized and protected against any kind of cherry-picking situation?

Sure, Rich. This is Scott. I think probably -- I don't have the Skilled Nursing specific number, but our Senior Care portfolio is generally about 90% of the portfolios in a master lease. So the vast majority of our portfolio and the Skilled Nursing portfolio has generally been around longer. Rich, when you say -- is it virtually all?

It's virtually all.

It's virtually all we think of the Skilled Nursing portfolio would be in a master, larger master lease.

Okay, great.

Your next question comes from Karin Ford of KeyBanc.

Just a question on Page 24 of the supplement, the Senior Housing Operating portfolio. The occupancy throughout the 110 basis points between 4Q and 1Q, is that just a mix issue and the addition of properties and fill-up in 1Q?

Yes, Karin. You're exactly right. The addition of both the Silverado and Senior Star -- Senior Star is [indiscernible] Silverado has a number of assets that didn't fill up. Net portfolio is slightly lower, somewhere in the mid 70s occupancy line. So in aggregate, we reduced the number there just slightly, but that's no reason.

Do you have a same-store occupancy number there or just a number excluding the properties and fill-up?

I don't in front of me, but I know from our general expectations that the overall portfolio we do think there’s room to improve occupancy. I would categorize the Merrill Gardens and the Benchmark portfolios as stable, and they’re in the low 60% occupancy. And then you have the Senior Star and Silverado portfolios, [indiscernible] fill-up assets somewhere in the 70s and growing quite nicely. It comprises the remainder of the portfolio.

Okay. And what type of rate growth are you seeing in, say, like the Merrill Gardens portfolio?

Karin, on the last I had spoken to [indiscernible] it was approximately 3% to 5% type of rate increases. Would you guys agree with that?

Yes.

3% to 5% is the approximate rate bumps we've seen in that portfolio.

Okay, great. Last question from me is just on the investment opportunities from here. George, I think you said a few times in your opening comments, you used the word disciplined. Is that -- are you sort of planning to take sort of a slower approach given the large amount that you've done in recent months? And can you just talk about the size of the pipeline that you have today for investments and what the composition is of it today as well?

Well, we're not going to comment on the size of the pipeline. But we continue to see really good projects. But we were, I think all of us a bit surprised at how large our investments were in 2010 and early 2011. And I think probably we'll slow a bit, but we never know. I mean, if you look at HCP and Ventas and ourselves, we had a great run, and there is still consolidation occurring in senior housing. And for that matter, we at Health Care REIT who do a lot of MOBs in acute care are seeing some opportunities as well in medical facilities. We're just not prepared to predict, Karin, how large our pipeline might be, but we are seeing -- we continue to see very good opportunity.

The HMLE portfolios, entity level deals and which asset type are you seeing more or less of today?

We're still seeing more senior housing, increasing numbers of SNF packages. We're seeing [indiscernible] potential deals. We're seeing it all right now. I think everybody is really amazing, consolidating in the sector at this point.

Your next question comes from Jerry Doctrow of Stifel Nicolaus. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Lots have been covered. I wanted to come back to just a couple of other things. So the entrance fee CCRCs and still -- if was reading the supplement right, it looked like the entrance fee component was sort of stable. I think those are backward-looking numbers in the fourth quarter, making a little progress on the rental side. Can you just give us a little more color about what's going on there and maybe bring us up to date since we're almost within a quarter pass of what state it was?

We just had [indiscernible] our largest CCRC operator. And they are doing particularly well on the rental healthcare component, even adding units to his facilities and filling them very quickly. The CCRCs continue to move at pace, Jerry, unduly quickly. The economy and especially the housing market hasn't turned up, so it's just going to be very much blocking and tackling, and he is doing a very good job with it. We're pleased with our portfolio. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: So you're seeing a little bit of incremental sales and [indiscernible] occupancy on the entrance fee side but not much. Is that sort of the way to…

That's right. But in some of the facilities where we've repositioned them, including Greenville, we've seen very good growth in terms of occupancies, even on the entrance fee side. And we've repositioned another facility, as well, to add even more wellness, as well as a SNF component that we think will drive some very good growth in that as well. Stephanie Anderson, do you want to comment?

Yes. The [indiscernible] are entrance fees that actually have deposits have increased significantly over first quarter. And so [indiscernible] those moving in as well as operating income is ahead of budget. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: I don't know if this is for Stephanie or back to George, but and your CapEx has got some expansions. Are those mostly the same properties, if I was reading it right?

They are. They're the healthcare component of the properties, and those will be opening in second quarter, and we expect those 2 to do very well. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Great, thanks. And then again, I would sort of echo, I think, Karen's comments about [indiscernible] same-store stuff. You gave out a couple of numbers on senior housing but just your sense of occupancy rate movements, particularly as we get into the first quarter here or maybe outlook, can you give me a little color but how comfortable are you feeling with the performance on the operating assets?

I'll take that, Jerry. This is Scott. I'd say we're very comfortable. I think the -- what we’re seeing on the rate side and, obviously, we can try to give you guys some sense. We obviously did not have the investments in our portfolio a year ago, thus we began reporting once we did acquire them. But because you have the environment where you have some assets [indiscernible], I think if you will all recall when we announced these deals, we were basically assuming about a 5% longer-term NOI growth out of the Merrill Gardens and the Benchmark portfolios. And that's what they've generated historically. And then even for example Silverado, I recall, with an increase of 7.5% return this year going to 8.5%, talking about 13% growth. And Senior Star is similar, much more significant growth. So I think putting it all together and if you look at the same-store results this quarter because of the assets and fill-ups, the percentages would be extremely high. So again, long term, we still think everything's filling up nicely and are comfortable with 5% or better on average for the portfolio for the long term. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: And last one for me. I don't want to repeat this step, but just on the coverage numbers on the Genesis stuff, there was a lot of numbers thrown out. So when you talk about sort of the 1.5 sort of your original underwritten numbers which was sort of a hybrid between 3 and 4 and then you talked about it being 2 now, and then I think you talked about it sort of worst-case being 1.2 to 1.3, so are those sort of trailing 12 current quarter annualized pre-management fee, post-management fee? Just to make sure I understand what the numbers are that I'm hearing.

Jerry, the 2:1 is pre. The 1.5 or so is after. And Scott, you want to comment on the 1.2, 1.3?

Yes, that would be after management fees, as well, Jerry. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Okay. So today -- if today they’re running about 2:1 pre-management fee; 1:5 post-management fee, and it might go down to 1.2 to 1.3 if we were back to -- a post-management fee if we were back to kind of RUGs-III level. Is that…

[Indiscernible] improvements, et cetera. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Okay, okay, okay. And all of those would be thinking of kind of I guess they're kind of a current quarter annualized or what you're saying the 2:1, is that sort of a trailing 12 or that's kind of where we stand today kind of go forward?

On the 2:1, that is where we stand today and also pretty consistently since RUGs-IV was implemented. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Great. I think that's all for me.

Your next question comes from Todd Stender of Wells Fargo Securities.

I think my question is more geared towards John Thomas. You mentioned there's 3 MOB projects recently moved to completion. Can you just go into some of the details surrounding those – timing, location, some of the initial yields you're expecting?

This is John. Two of those are in the Northwest, anchored by the leading hospital system. They are a large ambulatory, freestanding emergency rooms with physician office space. So great affiliated suburban projects. And again as I mentioned, they opened early. And the occupancy on those is right at 80% kind of hospital and the freestanding physician space and yielding close to 8%. The largest project was the Loma Linda University Medical Center physician office building. It's 160,000 feet. As I mentioned, it opened a month early and 98% filled and initial yield right at 9%.

Okay. And just refilling the development pipeline, what have you recently broken ground on and what does that look like for the next 3 quarters?

On the medical -- [indiscernible] larger 100,000, 150,000-foot affiliated medical office buildings pre-leased at, at least 80%. I think our overall development pipeline of what's broken ground and pre-leased is closer to 85% to 87%. And again they're all with leading healthcare systems, all affiliated. The largest project under construction right now that's referenced in the book is almost a 300,000-foot physician office building for the New Virtua Hospital Campus in Vorhees, just not too far from Philadelphia. And that project is about 85% pre-leased at this point and includes a substantial amount of hospital space and thus hospital leasing.

Thanks, John. And this is probably geared towards Scott. What does the buyer profile look like when you look at -- if you're separating the dispositions into your loan book and then the real estate? Who buys the loans? And then currently, is it really current operators buying your real estate?

Virtually all of the current operators who are repaying the loans are buying the real estate back.

Your next question comes from Tayo Okusanya of Jefferies & Co. Omotayo Okusanya - Jefferies & Company, Inc.: Again, back to the CMS-type question. I mean the reduction in the coverage ratio if you do end up with the cuts of 11.3% going to 12%. I guess my question is when I do look at all the different RUGs categories, you do notice that all the rehab and therapy categories are getting bigger cuts, most of those cuts are anyway between 15% to 20%. And just given the higher per diem rate that Genesis has within their own portfolio, it seems to suggest they have more exposure to these categories and are going to take a bigger cut. So how do you get comfortable? The number only goes to 12% when it seems like the percentage of cuts they may get may be higher than the 11.3% average that Medicare's putting into place?

This is Stephanie Anderson. And we actually have the cuts right now plus we've spent a lot of time over the weekend re-underwriting everything, making sure we understood the impact to our portfolio, as well as specifically to Genesis. Those numbers that we discussed and analyzed with Genesis, and we're very comfortable with them. Omotayo Okusanya - Jefferies & Company, Inc.: Very helpful. And then if a coverage does end up back at 1.2x, which is good that they're covering the rents, but if you do look at Genesis or any other skilled nursing operator out there, by the time you factor in the interest expense and any other leases they may be paying for, for assets that you don't own and all their other kind of general current obligations, it seems to suggest that quite a few nursing homes or skilled nursing facilities will start to become negative cash flow entities. I'm just kind of curious how sustainable that would be before this starts to become pressure on the rent.

We do not see that to be the case with any of our post acute or skilled nursing operators. We are very comfortable with where they are. Specifically in the case of Genesis, they do have the opportunity to convert some of their lower paying days to Medicare, improving the overall coverage. We still have great base in improving coverages due to their strong extant focus as well as their continued focus on the post-acute area. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. And then last question, what's your outlook at this point on Medicaid? And could that also be kind of an additional double whammy in addition to the Medicare issues that we're facing?

I would speak specifically, we just, as part of the discussion, when we look at the Medicare, the CMS proposal, we also dig in into the Medicaid discussion because as you know, CMS often, today, is very aware, and it's looking at an overall reimbursement to the post-acute nursing facilities. Our Genesis portfolio, as well as many of the other states, are still aiming up with a positive Medicaid increase of 1% to 2% in the states that we operate in. So we are not seeing a negative impact that everyone was concerned about. Omotayo Okusanya - Jefferies & Company, Inc.: So the funds you're getting is by July 1 when their budgets of Medicaid will be up probably 1% to 2% in the state you operate in?

Yes.

I can tell you, Tayo, I was talking to George Hager yesterday. They currently believe their fiscal 2012 Medicaid average rate increase will be positive 1%. Omotayo Okusanya - Jefferies & Company, Inc.: Interesting. Okay. And then, George, just going back to the senior housing operating portfolio, just along Karen and Jerry's recommendations, is there any way kind of going forward to finally get a sense of what's going to be going on or what's going on individually in many of these key portfolios? I noticed from the disclosure this quarter that you started to lump everything together. But I think it would still be helpful to kind of get a sense what's happening in each of the deals simply because they were all so large.

Understood. We hear your point. I'm thinking if we do think of it though as an aggregate portfolio and I do -- I know we'll be happy to give same-store results and add any aggregate portfolio and we will endeavor to extract some more color to give everyone a sense of how the individual components are doing. Omotayo Okusanya - Jefferies & Company, Inc.: That's all for me.

[Operator Instructions] Your next question comes from Stephen Mead of Anchor Capital Advisors.

If you look at sort of what happened in 2011, my perception it was kind of an opportunistic year for the 3 major Health Care REITs. And as the capitalization in the balance sheet kind of stabilized at a much lower sort of cost of capital, going back to the question about sort of acquisition and yield on the acquisition and the kind of environment that you kind of see going forward in terms of continuing to put money to work at an accretive rate, at what point would you sort of say let's slow down a little bit here?

Well, I think that all of us should be looking at when the pricing becomes difficult to justify. The pricing, frankly, has moved up as some of the larger transactions have been announced. So we'll just see who applies the discipline and who doesn't. We certainly look at that every week and understand why you're asking the question. We do internally as well, and presumably Jay and Bev [ph] are doing it as well. We'll see.

But where are yields now looking at?

Well, yields moved down probably 50 basis points or so on Assisted Living. And Independent Living has always been sort of a mystery as to how low they can get depending on the quality of assets.

Your next question comes from Jerry Doctrow of Stifel Nicolaus. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: I just actually wanted to see how you were feeling about development, George, sort of a follow-on to Steve's question. You've always done a fair amount -- I think you've always talked about the need to sort of be kind of at the head of the curve I think was the phrase used on this call. So you know, I think people have been sort of nervous a little bit about some of the CCRCs and that sort of thing. But are you seeing sort of good development opportunities and how big a piece is that going to be as the business kind of go forward?

Well, we clearly didn’t head to market exactly right on the CCRCs and we're not doing more but we're doing fine with them. They're very good assets, and probably in many respects the continuum of care, Jerry, in senior housing is going to be the wave of the future with a very small percentage allocated to volumes. So I wouldn't worry about that. But in terms of how we run the company, we're at 4% development right now. And as you well know, we've had great acquisition opportunities, both in senior housing and in John’s space on the medical facility side. So we're not going to be doing a lot. We have some limits that we sort of placed as goals on both Chuck Herman and John Thomas. But we, on the other hand, do believe that especially right now in medical facilities that the opportunity to take advantage of the need for capital in great health systems and the ability to pre-lease it 80%, 85% level presents some opportunities that we're going to seize. But we think those kind of developments where we move directly from development to stable are pretty attractive. But we're always going to measure our development.

Jerry, this is John Thomas. I failed to mention and should have in both in March and in April, we completed 2 large hospital projects, as well. So everything we've got currently in process or under -- in the near term starts or in large ambulatory care centers. Every one of them, all of it’s affiliated with leading healthcare systems and all of it’s coming through our relationships that -- where they look to us to help them grow their organizations. But Loma Linda, we just completed that hospital, and they started paying rent in April, as well. So you'll see that the next quarter but -- some $220 million hospital project. So everything we've got under construction right now is very conservative, but larger ambulatory care centers affiliated with hospitals.

And, Jerry, I think that our goal is to not only do some state-of-the-art more customer-centric facilities, but also use this as an opportunity to deepen our relationships like we've done in senior housing and to do more monetizations of their more modern and existing facilities as well. So we have a clear goal to deepen relationships with 10, 15 hospitals as we go along and to continue to do all of their business, not just the development. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: And on the senior housing side, you do some but more -- maybe more carefully underwritten or...

No, I think we tend not to do was our greenfield developments with new customers with very small exceptions. It's mainly master lease deals with some of our great operating partners or our [indiscernible] lease partners who we’ve been in business with for 10, 15, 20 years. We feel very comfortable with that. And as you know, the development is not keeping pace with the growth in demand. And it's a very good time to do very selective development to add to an already very strong master lease portfolio.

And there are no further audio questions at this time. Mr. Chapman, are there any closing remarks?

No, just again, all of us thank you for your participation. And we will be available for follow-up questions as needed. Thank you.

Thank you, ladies and gentlemen. This will conclude today's conference call. You may now disconnect.