Welltower Inc. (WELL) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2011 Health Care REIT Earnings Conference Call. My name is Tamika, 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 conference over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

Thank you, Tamika. Good morning, everyone, and thank you for joining us today for Health Care REIT's Second 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 presented in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and from time to time in the company's filings with the SEC. I will now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT for his opening remarks. George?

Thanks very much, Jeff. The second quarter of 2011 continues to demonstrate that Health Care REIT's relationship investment strategy has created a growth vehicle with increasing momentum. Thus far in 2011, we have completed $4.2 billion of gross investments, and during this last quarter, we invested an unprecedented $2.8 billion in transactions, including the Genesis HealthCare and Capital Senior Living portfolios. This period of significant investment volume has created a solid foundation for future embedded growth opportunities and importantly, meaningful earnings and dividend growth. The investment volume, coupled with portfolio of performance, has resulted in a 13% FFO and 10% FAD growth per share for the quarter and positions us well to generate 8% to 10% FFO and 68% FAD growth per share for the full year 2011. Our business model embodies the relationship investing philosophy, and it clearly differentiates our company. Our history of long-term relationships with over 60 senior housing operators and nearly 50 health systems has established Health Care REIT as a partner of choice. The investment growth I just referenced is evidence of that. Based upon the quality and diversification of these relationships, we are seeing a steady future flow of investment opportunities. In fact, even without the addition of any new partners, we anticipate a robust and reliable pipeline of investments at accretive rates of return, resulting in earnings and dividend growth for our shareholders. We expect a sizable run rate, a regular run rate of approximately $1.5 billion of organic annual investments just from our existing relationships. This growth vehicle is a key industry differentiator for Health Care REIT. The successful execution of our relationship investment strategy has resulted in a portfolio quality that is best in sector. Our portfolio includes operators and health systems that are highly regarded in the industry for strong financial performance and excellent clinical outcomes. We are not relying upon 1 or 2 quality operators, but have partnered with a number of best-in-industry players. The physical quality of our assets is compelling. We have an industry-leading portfolio in terms of age, tenant diversification and geographic concentration. Our portfolio of quality, combined with our embedded growth, is generating excellent performance and earnings growth this quarter. Our aggregate portfolio same-store NOI growth was 5%, and our RIDEA same-store NOI growth was 12.6% for the quarter. Our RIDEA investments are proving to be favorable additions to our portfolio diversification. They're in line with budget through the second quarter and remain on target to produce strong annual NOI growth over the long term. The integration of our RIDEA investments is complete. Our relationship teams are in place. Data is smoothly flowing into our accounting systems. Our communications with our partners are robust, and our operating partners are working together to identify synergies and share best practices. In May of this quarter, we convened our portfolio partners to develop a strategic plan for sharing best practices and developing collaborative strategies. Our partner CEOs and other executives, representing the industry's best senior housing operators and health systems, committed to convene regularly to discuss topics ranging from purchasing to information technology to marketing. This forum will enable them to evaluate and implement best practices, among the leading operators in the industry. In addition to best practice sharing, we are facilitating the creation of synergies between our partners. This quarter, I attended a number of meetings and site visits with our partners on the East Coast, deepening connections across acuity spectrum, from our hospital systems to our post-acute providers, to our assisted and senior living operators. We are proactively anticipating change in the healthcare industry and managing our portfolio as a collective investment whose operations can be optimized as a whole to create additional shareholder value. Now I would like to take just a moment to comment on the decision, the recent decision, reached by CMS regarding payment rates for skilled nursing facilities in 2012. While industry was surprised by the implementation of the 11.1% net parity adjustment, I think it is important to level set a few important facts. RUGs-IV payment levels resulted in higher-than-expected earnings per operators. The payment rates announced by CMS for 2012 will return reimbursement levels -- return to reimbursement levels that are 3.4% over 2010 RUGs-III levels. Post-acute providers will remain critical to the healthcare continuum as the lowest cost setting in a healthcare environment, with increasing pressure to reduce cost while providing high-quality care. As it relates to our portfolio, I would like to be very clear in stating that the rate adjustment will not affect Health Care REIT's rental income. Our investments in the skilled nursing post-acute industry, our triple-net leases with strong payment coverages at both the facility and corporate guarantor level. Our aggregate portfolio of coverage for our skilled nursing investments is the highest among our peers. And based upon our 40-plus years of experience investing in skilled nursing and post-acute sector, we structure our investments with sufficient payment coverage to withstand reimbursement changes such as this one. Our portfolio contains industry-leading operators who have proven adept at managing through reimbursement change for many, many years. As for our largest post-acute partner, Genesis HealthCare, our investment business remains intact. There are 4 reasons we invested in Genesis. One, Genesis has a focus on the post-acute care model, which provides a lower cost alternative to hospitalization. It also aligns well with the pressures to provide high-quality patient care in a lower cost setting. Two, and very importantly, Genesis is very well positioned for growth of its quality payer mix as it continues its focus on the post-acute patient population. Unlike many of its peers in the industry, Genesis has the potential to significantly increase its quality mix in the future. In fact, it's grown its quality mix by 2% year-to-date, a trend that has continued since 2006, where the quality payer mix has grown from 47% to 55% in 2011. And for your benefit, as a rough rule of thumb, for every 1% improvement in quality mix, our Genesis facility coverage will improve 5 basis points and it adds $12 million to Genesis' EBITDAR. Third, the Genesis-HCN partnership will result in significant external growth opportunities. We expect the CMS rule to amplify these additional market share opportunities by generating a pipeline of potential acquisition targets as smaller operators struggle to satisfy the requirements of the rule, and this favors the institutional quality operators, such as Genesis. Finally, there is a significant overlap between Genesis' geographically dense portfolio and Health Care REIT's senior housing assisted-living and hospital partners in the Northeast and Mid-Atlantic regions. We believe this overlap creates continuum of care within Health Care REIT's portfolio of operators that is being capitalized upon through the exploration of synergies among our portfolio partners. In closing, we have delivered a very strong second quarter. We held -- recently, we held our first ever Investor Day in May and had outstanding attendance. And it was a great opportunity for our investors and analysts to learn more about our relationship investment strategy as well as to meet both a number of our talented senior executives and portfolio partners. Through our relationship investment strategy, we have created a growth vehicle with increasing momentum. We see this in the $2.8 billion in transactions closed this quarter and the over $7 billion of investments we closed since 2010. Most importantly, the investment growth over the last 15 to 18 months is now translating into meaningful earnings growth for our shareholders. We are very pleased with the 13% FFO and 10% FAD per share growth this quarter, and through our existing relationships, we will continue to see additional investment opportunities as well as generating meaningful earnings and dividend growth for years to come. I'll now turn to Scott Estes, our CFO, for a brief financial and portfolio overview. Scott?

Thanks, George, and good morning, everybody. As George discussed, we just closed the most successful quarter in our history on the new investment front, completing $2.8 billion of growth investments in the second quarter. This brings our year-to-date total to $4.2 billion. Our recent success on the investment front fueled the significant double-digit FFO and FAD per share growth in the quarter, enabling us to meaningfully increase the dividend while continuing to drive down our payout ratios. Our portfolio also performed very well in the second quarter, highlighted by blended same-store cash NOI growth of 5%, which was driven in particular by the strength of our operating RIDEA portfolio's performance. In addition, our portfolio diversity by relationship and our rent payment coverage levels remain among the best in the sector, positioning us to have limited, if any, revenue risk from the inevitable cycles that occur in government reimbursement. Finally, our balance sheet is also in great shape as our new $2 billion line of credit and over $328 million of cash on hand put us in a great liquidity position to continue to grow the portfolio. We believe the success of our relationship-based investment program will continue to generate meaningful assets, earnings and dividend growth into the future. Turning now to the details of the quarter. Regarding investment activity, as I just mentioned, we did complete $2.8 billion of growth investments during the second quarter at a blended yield of over 8%. The most significant of these investments included our previously announced $2.4 billion Genesis HealthCare transaction and $142 million investment with Capital Senior Living. We also acquired 6 senior housing assets with existing operators for an aggregate $96 million and an average initial rental yield of 7.7%. We acquired 6 medical office buildings out of existing relationships that are all affiliated with health systems for an aggregate $65 million at a blended yield of 7.6%. And finally, we acquired a skilled nursing asset in New Jersey with Genesis at the end of the quarter. That was the first asset beyond our initial transaction for $21 million at an initial yield of 8.25%. In terms of dispositions, we completed $257 million of asset sales and loan payoffs during the quarter, generating over $30 million in gains and $3.8 million in fees. Turning now to portfolio performance. First, our stable triple-net senior housing and care portfolio continues to perform in line with expectations as senior housing payment coverage stands at a solid 1.5x, while occupancy remained at 88%. We generated strong, same-store cash NOI growth rates within both the senior housing and skilled nursing portfolios during the second quarter. Same-store senior housing NOI increased 4.1% versus last year, while our same-store skilled nursing NOI rose 2.2% versus the same period last year. I will now spend a couple of minutes discussing both our current as well as our future expected skilled nursing portfolio payment coverage. First, I'll comment on the current portfolio coverage as of today. Our existing skilled nursing portfolio coverage, as reported in the supplement, which is prior to the Genesis transaction, increased 4 basis points to the current 2.4x, the highest level among our peer group. The current Genesis portfolio facility level coverage as of today is 1.9x. When blending the Genesis portfolio into the existing Health Care REIT portfolio, our current skilled nursing portfolio covers in excess of 2x today. At this point, I'll comment on our preliminary expectations for the Genesis portfolio coverage under the new reimbursement changes effective in fiscal 2012. Our team has really spent a lot of time working with George Hager's team, since the announcement of CMS late last week, to assess the potential impact of the pending changes in reimbursement. As an important reminder, we had a single master lease that covers our entire 148 facility Genesis portfolio as well as the corporate guaranty. I think the best perspective on the security of our investment is the fact that Genesis' corporate level fixed charge coverage is about 1.6x today, and in 2012, is projected to be approximately 1.4x even taking into account the full effect of our rent increaser. These coverage numbers also do not include the full potential for improvements in quality mix, which as George discussed, increased coverage at a rate of 5 basis points per percentage of quality mix improvement. In addition, we expect Genesis will generate approximately $100 million per year of free cash flow after all corporate overhead, rent expense and interest expense. The company has significant liquidity, virtually no debt and is led by seasoned management team. As a result, we remain confident in Genesis' ability to continue to pay a rent and increasers in the new reimbursement environment. Now at this point, I'll provide an update on our senior housing operating portfolio, which is comprised of our RIDEA partnerships. As of June 30, the operating portfolio represented $2.2 billion or approximately 17% of the total portfolio investment balance. As you can see in the supplement, the blended occupancy across our 4 operating portfolios increased by over 200 basis points versus the prior quarter to the current 86.3%. We also did expand our operating portfolio disclosure to provide same-store performance metrics for the second quarter versus the second quarter of last year. And I think as you can see, our operating portfolio is off to a great start, generating a 12.6% increase in same-store NOI in the second quarter versus the comparable quarter last year. With a portion of both the Silverado and Senior Star portfolio still in fill-up, we believe our operating portfolio occupancy has room for considerable growth over the next several years, providing a source of increasing NOI and earnings growth. Longer term, we continue to expect the operating portfolio to generate average NOI growth of 5% or better. Moving on to the medical facilities portfolio. Our medical office portfolio had another strong quarter, with occupancy up 40 basis points sequentially to 93.3%, with trailing 12-month retention at a solid 84%. We also generated same-store cash NOI growth of positive 1.4% in the second quarter. In regards to our hospital portfolio, cash flow payment coverage remains strong at 2.7x. And we, again, experienced solid 2.4% same-store cash NOI growth in our hospital portfolio during the second quarter versus last year. Our Life Science portfolio also continues to perform better than initially under written expectations. As we mentioned last quarter, both leases which have renewed this year, have been at rates approximately 40% above previous rents. We do anticipate reporting same-store results on this portfolio beginning next quarter, and we continue to expect to meet or exceed our long-term NOI growth expectation of at least 5% in the Life Science portfolio. Turning now to financial results. As George mentioned, we reported normalized second quarter, FFO per share of $0.90, up a strong 13% versus last year's quarter; and normalized FAD per share of $0.80, up 10% versus the comparable quarter last year. As George also mentioned in his opening remarks, we are now in position to generate more significant earnings growth over the next several quarters, driven by our success on the investment front, the strong NOI growth expected in our senior housing operating and Life Science portfolios as well as the solid 3% to 3.5% rent increases expected across much of our triple-net portfolio. Our G&A expense came in at $19.6 million for the second quarter, which did include about $2 million of one-time expenses related to the timing of some initial tax and audit work for our RIDEA joint ventures to integrate the new platforms as well as the cost of terminating the lease at our former office. As a result, we do expect a G&A run rate of approximately $18 million for the remaining 2 quarters of the year. Regarding our dividend, we recently declared the 161st consecutive quarterly cash dividend for the quarter ended June 30 of $0.715 per share, representing a 5% increase over the same period last year and an annualized rate of $2.86. Our FFO and FAD payout ratios for the second quarter declined significantly to 79% and 89%, respectively. In terms of our capital activity, this was a relatively quiet quarter for the company as the only capital raised was the issuance of 625,000 shares under our dividend reinvestment program, which we did at an average net price slightly above $50 per share generating over $30 million in proceeds. In addition, no shares were issued under our equity shelf program during the quarter. On July 27, we replaced our existing $1.15 billion credit line with a new $2 billion line. The new line has an initial term of 4 years with a 1-year renewal option and an accordion feature allowing us to expand the line to a maximum of $2.5 billion at our discretion. Borrowings are priced in LIBOR plus 135 basis points based on our current ratings and with an annual facility fee of 25 basis points. We currently have no borrowings on our new line. In addition, driven largely by disposition activity that occurred towards the end of the quarter, we had over $328 million of cash on the balance sheet as of June 30. As a result, we believe we're really in an excellent liquidity position, with over $2.3 billion available entering the third quarter. And note that our larger line capacity provides us with additional flexibility to allow us to raise permanent capital less frequently than we have in the past. Turning to our credit profile. Debt to undepreciated book capitalization currently stands at 45%, while our secured debt to total assets is currently 14%. Our interest and fixed charge coverage for the quarter remains solid at 3.4x and 2.6x, respectively, while net debt to adjusted EBITDA is 5.4x. Longer term, we will continue to look to drive debt to undepreciated book capitalization down towards the 40% level, and to maintain net debt-to-EBITDA of 5 to 6x. Finally, today, I would like to review our updated 2011 guidance and assumptions. We are narrowing our 2011 guidance slightly to reflect the fact that virtually all of our dispositions have now occurred during the first half of the year. As such, we have fine-tuned our FFO guidance to a range of $3.34 to $3.40 per share and FAD guidance to $3.02 to $3.08 per share. Our revised FFO and FAD per share ranges reflect strong 8% to 10% and 6% to 8% increases, respectively. And we believe that we remain well positioned to generate significant earnings growth again in 2012. I would note that since most investments occurred very early in the second quarter, while the vast majority of second quarter dispositions happened late in the period, we do expect that our third quarter run rates for both FFO and FAD to be approximately $0.03 below the results reported in the second quarter. And as a final reminder, our earnings guidance does not include any investments beyond what had been announced in the second quarter. Disposition guidance for the year remains $300 million, of which $282 million has been completed through June. With that, that concludes my prepared remarks. And operator, could you please open the call for questions. Thanks.

[Operator Instructions] Your first question comes from the line of Jeff Theiler with Green Street Advisors.

I don't know if I missed this. Did you mention what you thought the projected EBITDAR coverage would be post CMS adjustment?

This is Scott. We mentioned that the current corporate level fixed charge coverage is 1.6x. And under the post-CMS adjustment rule, 1.4x. We said, frankly, the answer to your question is it's 1.3x to 1.4x.

1.3x to 1.4x?

Yes.

Okay. Great. And can you give me a little bit color on the kind of margins that Genesis is running now versus how those are going to change after the CMS adjustment?

Jeff, this is Stephanie Anderson. We have looked at that with our current margins today as well as the offsetting operational efficiencies that they have already begun to put in its place. And we feel comfortable that they will still be industry-leading margins, and that they'll support the 1.4x coverage ratio after management fees and do well on a go-forward basis.

Okay. And then do you have to change your projected Q-Mix that Genesis has ramp up to the kind of keep adequate coverage on the lease escalations?

Right now, as Scott reported, these numbers do not assume additional Q-Mix improvement. So we think we have substantial upside of maybe 1 to possibly 2 percentage points of improvement a year as he's done this year, would really enhance their already strong coverages.

Your next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

Per conversations with your skilled nursing operators, do they comment on their outlook for Medicaid and kind of any coverage sensitivities around that?

Jana, it's Scott. I would think probably that Medicaid perspective is obviously, that state budgets are in the process of being finalized. I can tell you, as you think about our skilled nursing portfolio, Genesis is about 2/3 of the investment balance. And as George has mentioned, as a part of our initial acquisition conference call, they expect their Medicaid rates to be flat to maybe even up 1%. If you think about their market, they're in a lot of the stronger Northeast and Mid-Atlantic states. And as we've analyzed the rest of our portfolio, we're expecting Medicaid rates across the portfolio to be may be flat to down 1%. So it's probably a general perspective I could give you.

And then on the $1.5 billion of embedded investments within the portfolio, can you maybe just break out which product types or kind of what the percentages are between the senior housing and further skilled nursing or medical office?

I think that this year has been -- last year and this year so far has been pretty indicative of what is happening, and that is that there are more consolidation opportunities in senior housing than any other area that continues. On the other hand, in John Thomas' group, we continue to get our share of medical office buildings and outpatient-type facilities. So I expect it to run 2/3, 1/3 perhaps this year and next. But after setting that, everything is very opportunistic in our world. So that's the way it's been going so far. And we're seeing awfully good senior housing opportunities, I should say, especially along the East and the West Coast in very tough infill markets that should put us in great position going forward.

Your next question is from the line of Derek Bower with UBS.

It's Ross Nussbaum here with Derek. A couple of questions. First, how are you feeling about what's going to happen this fall with respect to the second phase of the budget debate and how that may impact reimbursement for skilled nursing?

I don't think anybody knows, Ross, for sure. But again, this is already a significant cut to skilled nursing that we can easily handle. I guess there's a reason why we're always running around 70% private pay, and we're happy to be there right now. But we think there could be some additional changes. But I think all of our folks are in a great position given the payment coverage buffer to do quite well. And as you well know, having been in the industry for a long time as well, again, we have periods where reimbursement is improved like it has been in skilled nursing for the last 5 to 6 years. And then you would have a bump in the road like this, and it's going to continue to go like this as we look to the future as well. So it's going to be very manageable, and we'll all have to wait and see what Congress does in there -- so in their usual workmanlike way.

Are you worried at all that any of the insurance companies are going to look to what happened on the Medicare reimbursement front and look to potentially reduce payments?

Anything's possible, but we don't necessarily anticipate that. But when we're in a -- when you're in skilled nursing or if you're in acute care, those things can change from time to time. But the reality of looking at reimbursable type of facilities is that they are very efficient. I mean, I made a comment in my opening remarks that there is nothing more efficient than a skilled nursing facility in terms of delivering cost-effective care. And ultimately, that should be the mantra of Congress and all of us when we look at what we're paying for and what we're getting for. So that continues even after 40 years being in this business to be something that we believe should always be the focal point in evaluating the success or failure of any types of facilities. And if you look at post acute, like George does so well and Paul does over at HCR Manor Care, I mean, they have become -- those facilities and those kind of companies have become even more pivotal and more important to the delivery of decent healthcare going forward. So we remain really very confident in the success of skilled nursing, and for that matter, well run, efficient patient-centric health systems.

Okay. And then finally, as you look out over the next couple of quarters, and I know you don't put acquisitions into the guidance, but just what you're seeing in terms of the pipeline as well as your appetite for new investments. Are you -- is there any reason to believe you're backing away from new investments? Or is it still sort of full steam ahead on that front?

I think that cap rates have come down, and therefore, we're becoming even more selective in our investment. But we are seeing tremendous opportunities. As I mentioned just to the previous conversation that we're seeing some great opportunities down the East and West Coast, and we think over time, those are going to be wonderful additions to our portfolio.

Are you seeing the same level of potential portfolio opportunities out there? Or is it sort of back to the old sort of onesey-twosey, regional, smaller kind of opportunities?

Well, we're not -- there are not a lot of nationwides Manor Care or Genesis out there, but we're seeing hundreds of millions of dollars worth of terrific opportunities. So we're not back to the steady state where we're just doing 1 after another. There are some awfully good portfolios out there.

Your next question comes from the line of Jerry Doctrow with Stifel, Nicolaus. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: A lot have been covered. I'll just do a couple of follow-ups. George, on acquisitions, would you be buying additional skilled nursing facilities here? And I guess I was curious as whether you think cap rates are sort of moving back up for skilled and even for senior housing as well?

Well, first of all, predominant investment type, as I said earlier, is going to be senior housing. And on the other hand, in skilled, we're going to support George and his team as we think there are going to be tremendous opportunities. I do think you're going to see, Jerry, in skilled nursing that the pricing is going to have to change a little bit. Cap rates are going to move. And yet we also think there are incredible opportunities as the industry consolidates because frankly, as I said in my opening remarks, some of the smaller operators who have some really good assets are not going to want to fight it out with some of the new rules. And it will give George and his team, the opportunity to move down the East Coast, which we think is just an incredible opportunity for him. And it will be a wonderful collaborative opportunity for George and his team along with our health system clients and our assisted living senior housing operators. So we will support George, and we will support certain skilled nursing operators. But right now, the emphasis or focus has been on high-quality East and West Coast senior housing. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Okay. And just on the senior housing kind of operating portfolio. I mean, you had tremendous quarter-over-quarter jump in occupancy, I think 200 basis points. I was just curious as to how the stabilized stuff might be doing versus kind of the lease sub, just to get a little more color there?

Scott, do you want to handle that?

Sure. Jerry, you're referring probably to the RIDEA portfolio, I believe? Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Yes.

I guess first on the aggregate portfolio, as I mentioned in the opening remarks, one of the great parts of our portfolio is we have some assets and fill-ups. So you clearly have an 86% level with a very good chance of continuing to improve the overall occupancy. And I would categorize your question regarding stable occupancy in the quarter performance was about flat. I think you're seeing good rate growth. And of the 12.6% aggregate growth, at least half of it is coming from the stable portfolio and we're obviously getting some benefits too from assets and fill-up like we've been talking about. So it still seems to be like the quarter overall, NOI growth definitely in excess of 5% for the stable portfolio. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: Okay. That's helpful. And then just last, so the entrance fee stuff, I understand it's not that big a portion of the portfolio. But I think occupancy is only still 54%. Just curious at how you're dealing about that, whether we've got any prospects for further rent increases there. And actually, maybe just any comments about the entrance fee business in general?

It's been slow and pretty steady, Jerry. I mean, you have visited -- you and your team have visited some of Donald's projects, SLC's, and they're doing very well on the rental. And we've even added on in the healthcare component, and they fill immediately. And the entrance fees keep moving up slowly. I mean, it's still most directly impacted by the housing market and the economy generally, but he's doing a great job. So we're going to do fine, and I do hope we're going to see regular rent increases till we get back to the original rate and do pretty well over time. This is a product that is very dependent upon the economy, and once the economy does start up, we're going to see the most significant growth improvement in that sector. But again, as you say, it's a small part of our portfolio. We're not going to add to it, but we're pleased with Donald's efforts today. Jerry Doctrow - Stifel, Nicolaus & Co., Inc.: George, I think you upped the rents last January. Is that sort of an annual review? Do you look at it quarter-by-quarter?

No, annual review pretty much.

Jerry, it's Scott. I think I'll just add a quick comment. I would say that we are having a strong July. I would note that both our entrance fee and rental occupancy components are up an additional 1% to 55% in the entrance fee and 89% in the rental fees as of today.

Your next question comes from the line of James Milam with Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P.: Just want to ask 2 questions, I guess, around the SNF portfolio. But the first one, I understand what you guys have said about the way the post-acute assets are positioned and the care continuum, how you think that's a low-cost, clinically appropriate setting, et cetera. But I'm wondering if in the underwriting of Genesis and the strategy behind that investment, if you felt like you had more of a supportive partner on the reimbursement side, and maybe now with RUG-IV and now maybe some of that support is going away. I'm just wondering if your investment thesis would have changed at all given where we are now versus where we were at that point?

Well, we'd rather not have had 11% announcement by CMS. But George didn't want it, Paul Ormond didn't want it, Jay didn't want it. So I mean, it's not a positive. But the fact is that we saw one of the most experienced management teams that needed a partner like us and had capital to enhance their ability to improve their quality mix, and I think that's where I'd like to take you back to. George has the ability now to move from 55% to 65% Q-Mix, a very, very significant increase in coverage for us. And he has the ability to be a consolidator in that industry and to collaborate very well with our senior housing operators and health systems. Already, we're seeing some of that cross referrals working and making all of our partners in the Northeast and the Mid-Atlantic better. So our thesis remains the same, and we think they're a terrific team. And they've managed through a lot of these kind of changes, ups and downs, and they're going to continue to do it well. I've been out on the East Coast with George and Mike and their team to meet with health system leaders, and we'll continue to do that and continue to drive to the extent we can an improvement to the healthcare delivery system. And George and Mike and their team are just critical to that. So our thesis remains the same. James Milam - Sandler O'Neill + Partners, L.P.: Okay. And then just, I guess, a follow-up to that. As you guys look at acquisition opportunities with Genesis, you did one in the quarter for 8.25% cap rate. I'm just wondering if you have any changes on your pricing expectations. I know it's a little early in terms of transactions coming out now, but maybe just your thoughts going forward from here.

We have already set a matrix for our returns. So George knows what we need, and he's comfortable with that. How much we decide to pay together for our assets is obviously going to change somewhat in light of the Medicare situation, but we're seeing some great possibilities there. And again, we're looking at this as not just a SNF investment. We're, in a narrow sense, looking at it as post acute adding to the continuum of healthcare delivery, and also looking to George and his team to interface effectively with the rest of our operators on the East Coast. Again, as I say, we're looking to expand George's reach, and I think we're going to have some really good opportunities now to do just that. James Milam - Sandler O'Neill + Partners, L.P.: Okay. Is the matrix, is that initial cash yield matrix, or is it an IRR-based matrix? How do you guys look at the core return there?

Yes, it is a cash yield matrix based on investment, and it allows us the ability to make sure that we're getting the right yield for the marketplace.

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

Just a kind of a conceptual question. What's to stop Genesis or any of your partners from inviting competition from other real estate landlords to engage in acquisitions with them?

We have exclusivity with most of our key operators. We do with George, and we're working very effectively together. But even beyond the contractual provision, everything comes down to their -- our operators continuing to think we're the best partner, and I think they do. We work with them all the time, Rich. We don't do a large transaction and put it on the shelf and forget about it. I've been on the East Coast a lot with George and his team, and so are all of our key executives and our RIDEA teams. It's that day-to-day relationships with a lot of our people and the value add that continues to get us more work from key people in the healthcare industry. So we have a lock-on on a lot of the business. But again, it comes down to, again, proving ourselves quarter after quarter.

Okay. Just back to the acquisition, the 8.25% cap rate. Is that -- I assume that was done well in advance of the CMS news. If you were to kind of try to do an apples to apples in that, what would that 8.25% number be in your mind? You talk about how you've had this matrix. I mean, can you quantify a cap rate adjustment that you would make on sort of on that transaction specifically?

Well, let me clarify your point. That was a beginning lease rate, okay, and we had coverage on top of it. And so we have very good initial yields built into the matrix with good coverages as well, and I don't think there's any reason for it to change.

Okay. Scott, you mentioned at the beginning of your remarks, the 1.4x fixed charge coverage for Genesis. What are their other fixed charges besides rent?

There's some small third-party rents, and we don't have all the assets in the portfolio. That's the most significant because there's very little, virtually no debt.

Okay. And then last question, I guess, is sometimes, these broad-based announcements from CMS, we can all recall PPS for nursing homes and the unintended consequences that came from that. And I'm curious if have you kind of thought about unintended consequences of the 11.1% cut? And what are some of the trigger points you're looking for, and for something to come along the line from this that could change the landscape to the negative? And have you thought about that? And what are you looking for?

You're asking us to speculate, probably to our detriment as to what might come along. I guess...

What could go wrong, George?

And we've done that before. I think that this was a very significant cut back to the normalized kind of reimbursement from 2010, and we're back on track for that. I don't think that we're expecting a lot of bad news going forward. The reality is that skilled nursing post acute is the most effective provider of healthcare on a cost basis, and also increasingly, with people like Paul Ormond and George Hager and others providing terrific clinical outcomes. So we think the SNF post acute facilities' place in the healthcare delivery system is even stronger than it was in the past. So we're very confident going forward.

Your next question comes from the line of Michael Mueller with JPMorgan. Michael Mueller - JP Morgan Chase & Co: It was actually asked. Thanks.

Your next question comes from the line of Philip Martin with Morningstar.

Not to put words in your mouth, but given your relationship strategy and obviously the opportunities you're seeing up and down the coasts and elsewhere, it sounds like there are some opportunities with the smaller skilled nursing operators given their lack of efficiencies, et cetera. How does Health Care REIT, with its existing portfolio and any incremental growth with new operators, participate in the improved margins, the improved efficiencies that a Health Care REIT would bring outside of, let's say, a RIDEA structure? How do you participate in the improved margins as these SNF portfolios are repositioned down to some extent in terms of quality mix, et cetera?

Well, I think the way we're going to play in the SNF post-acute area is primarily through key portfolio operators such as George, okay. We're already looking at some real terrific opportunities. And as people get back to reality as to the value of, like, Manor Care or Genesis and as well as Health Care REIT's, we think that there is going to be incredible value build up in Genesis. And of course, we have a 9.9% option, so we'll share in that success. So that's the way we're going to play it. We're going to have 3 or 4 just key nursing home operators that will be consolidators in that space. And again, the way we structured the deal with Genesis, we'll share pretty significantly in that. And the odds are that when the market gets back to reality on the value of skilled nursing, especially the post-acute providers, that you might even have some liquidity that's in the form of IPOs or whatever for any number of these companies. So think we're going to be in a very good position.

Acting as a bit of a roll-up partner possibly as you renegotiate leases or renew leases with existing operators, bring them into, for example, the Genesis fold, et cetera, that's the idea?

Well, it could well be that we can facilitate that. But all of our operators are independent-minded, and if we see the opportunity, we'll be all for that. But it's going to be up to them.

Okay. Okay. And then one other question, and I know my colleague, Jason Ren, is sitting here with me and has a question. But -- and this might be for John Thomas. I don't know if he's on the line or not, but...

He is.

Okay. From the not-for-profit side, I mean, obviously, over the last several years, you've talked about dealing with not-for-profit hospital systems, et cetera, growing your relationships with them because that would be a product line for you going forward. How have the last couple of years change their attitudes, if any, the last couple of years in terms of 2 respects: Health Care REIT's platform growth and also just what's going on in the financial markets, et cetera? How have not-for-profit attitudes changed toward the repositioning of their portfolios, the managing of their real estate risk and their interest in doing deals with a group like HCN?

Yes, Phil, it's a great question. It's evolved and turned in our direction very positively. Most of what we've done last year has been with the not-for-profits. And between healthcare reform and really the incentive to consolidate and buy or employ physicians has caused the not-for-profits to look to the private capital to develop bigger ambulatory care centers to house and consolidate those positions into an integrated facility and then just a shortage of capital. The one thing we haven't seen is a big monetization or maybe monetization opportunities by the not-for-profits. They have not gone -- not inactive or very active in selling their buildings as much as you would think, but the cost of capital between the tax-exempt municipal market where that has squeezed very narrowly to our cost of capital. We've had a lot of opportunity and we see a lot more in the pipeline.

Okay. Perfect. And Jason has a question here as well.

I was just wondering if you could detail a bit further on the CapEx requirement on the Genesis portfolio going forward and how that might be split or not split between you guys and Genesis? And also just in sum, would you describe your aggregate consolidated portfolio's risk profile as being improved since year end 2010?

Well, I'll get the one on the CapEx. It is a triple-net lease, where Genesis does all of the capital expenditures to refurbish. And then if there are projects that are rehabbing or changing the therapy in order to access the post-acute model, they would bring that to us and we would evaluate it based on IRR and get some return on it in the lease. And we also have that -- is already contemplated within our lease at a very good return. And the second question, I've already -- I think Scott has thesis [ph].

[indiscernible] the question was where we came to this in 2010 out in the skilled nursing industry. A lot of different moving parts to that. I don't know how to answer...

As to the risk on the skilled nursing industry, I think with the 2.4x cover, that it is very strong. And we have very good operators who understand how to work through reimbursement cuts. We knew this going in, that regulated -- reimbursement is regulated, does have some volatility in it. But we feel very comfortable in their ability to reduce overhead spending, operating expenses and improve the Q-Mix.

And I should add that during the last 5 years at least, a good part of our dispositions have been Medicaid-oriented skilled nursing. So our focus is on folks that like Genesis that have wonderful post-acute opportunities. And therefore, putting a more -- helping them with capital improvements to make them an even more efficient post-acute provider, especially in Genesis' area, where they have a densely concentrated platform, is a very good investment of our -- for Health Care REIT.

And I would have to think that that's going to be an opportunity for you with your existing in-place portfolio in terms of organic growth and some of the relationships you have with smaller SNF operators as they, again, want to spend some CapEx dollars to better position their asset within the system, within the healthcare system. Is that a fair statement?

It's fair.

The only thing I was going to add, Philip, is, and I was just going to point out that under RUGs-III back in 2010, our existing portfolio covered 2.4x. So you don't see a great swing. This is obviously an update to rate. This isn't a change in the system, so it's a big differentiator. And obviously, the industry's been in a fairly reasonable position. It'll just take some time to work through the changes from an operating perspective.

Your next question comes from the line of Rob Mains with Morgan Keegan. Robert Mains - Morgan Keegan & Company, Inc.: Just a couple kind of picky number questions. First one, on the Genesis fixed charge -- corporate fixed charge number you gave us. For the therapy business, I assume that includes the impact, not just the 11.1% cut, but all the other aspects that would affect the therapy business?

That's correct, Rob. Robert Mains - Morgan Keegan & Company, Inc.: Okay. And then Scott, in the guidance that you have for the components of FAD, am I correct that noncash interest expense bumps up on the second half of the year?

One sec. Let me just... Robert Mains - Morgan Keegan & Company, Inc.: And if this is too detailed, we can do it offline.

It was -- I believe it's $0.01 different in our last forecast, so well, we can look at that and do the comparison offline.

Your next question comes from the line Jowell Bealty [ph] with Morgan Stanley.

Provide us an update on your thoughts about maybe repositioning your triple-net senior housing assets into a RIDEA structure?

We'll always look at that as an opportunity. We already have, as you well know, a triple-net lease relationship with Brandywine, who I just visited with, I think, Tuesday. And there was an option to convert to a RIDEA structure. And they have some good upside potential, and it might be very good for Brandywine and us some time within the next couple of years. But our goal remains, at least for now, being somewhere between 20%, 25%, maybe a touch higher, if we have good RIDEA opportunities.

And I was also wondering if you could provide us an update on your view for development opportunities across the asset classes beyond what is already in your pipeline?

Well, as you know, we're going to hang around 4% or 5%, probably on average in development. We are seeing some opportunities for renovation adding on to existing facilities. I was talking to Jerry about even our entrance fees/rental facilities for a Donald Thompson's, we've added some great rental healthcare components to that. We always see that adding on to an existing successful portfolio or facility is just a terrific opportunity. We'll continue to do that. And we will build for some of our better senior housing clients subject to about the 5% cap, and we see that as a potential positive for us. And then in John's area, acute care, there's no question that the platforms are changing. So we're, at the very least, going to go in and help the health systems substantially renovate their facilities to make them more customer-centric and also in recognition of the fact that 60% plus of the procedures are outpatients. So there are opportunities there as well, but we're going to hang around the 5% level and take advantage of good opportunities. And I also add too that in the skilled, that they just -- in the senior housing area, we do them for folks that are already substantial players in our portfolio and subject to master leases. And then in the MOB space or in ambulatory care centers, we're looking for either a strong guarantee for a health system or -- and our standard for MOBs is at least 75%, if not 80%, pre-lease. So we're not talking about the kind of development risk that people can worry about. We think these are really terrific opportunities.

Your next question comes from the line of Tayo Okusanya with Jeffries & Company. Omotayo Okusanya - Jefferies & Company, Inc.: So quick question on the senior housing operating portfolio. Occupancy fell 20 basis points quarter-over-quarter. I think in general, the trends you're kind of seeing out of NIC still kind of remain somewhat tough. So curious about, again, how you think about that portfolio and the earnings growth you could get out of it over the next 12 to 18 months relative to the 5%, 6% same-store NOI expectations?

Tayo, it's Scott. Yes, I'd say we're very excited about the senior housing operating portfolio. I think you've seen -- you're kind of blending a few different questions there. In general, the fact that we are seeing solid occupancy, have assets and fill-ups, good rate growth, I mean, we're very comfortable with our longer term NOI growth projections in the RIDEA portfolio performance. In aggregate, it's essentially tracking right in line with our initially underwritten expectations at this time. And in general, as you think about just the NOI, there's been some questions this quarter about the industry performance. And it seems like occupancy has been pretty stable the last few months. We've seen some improving trends. So I would really get back to portfolio of senior housing, the triple-net portfolio occupancy of 88%. I believe is right about in line with the NIC average. And you really haven't seen a heck of a lot of movement there. And we also have reasonable coverage in that portfolio as well. So I would characterize it as stable overall and that RIDEA is a great opportunity for us. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. Do you think -- I mean, on a long-term basis, where you could probably get to the 5% number, do you think you can get there in the first year of this deal?

First year of this deal, well, we have the first quarter as a comparison even though that wasn't in our portfolio last year of 13% growth. So with a lot of room to run, I think you clearly have an opportunity to have great growth this year and it should actually continue for a number of years. So that was obviously a part of our comfort in saying longer term, 5% growth or better over the next, call it, I call it longer term. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. That's helpful. And then the second question is kind of more in line with over the next 6 months, so there's a lot of the noise around Medicare, Medicaid, the government continue to kind of play chicken with this thing going into November, December. One, how do you think that ultimately shakes out, if you have any insight into that? And then two, specifically, if you do see some type of big fix with the physician doc fix, if that has any impact on your thoughts about the MOB space?

This is John. I'll take the doc fix. How they play this game every 18 months. In the end, we would expect a neutral to maybe slight increase from the doc fix. Our physicians, most of our physician medical office space is not very heavily concentrated in Medicare or Medicaid, so would not have any meaningful impact there. But yes, we would expect the Medicare doc fix to get fixed, and it's a very expensive fix. But they play the chicken game every year. Omotayo Okusanya - Jefferies & Company, Inc.: But you guys don't have any meaningful exposure to Medicare anyway on that side.

Not on the medical office side. We don't measure every doctors' office payer mix like you do with, like, the skilled nursing. It would be less than 20% at most, and they make their money on the commercial side with the physicians affiliated with hospital systems like ours. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. Then just a quick question on Genesis with the mitigation on the Medicare stuff. Is it really the change -- potential change in Q-Mix that gives you most of the mitigation? Or is it really going to be more of a cost cutting operation?

They definitely have some expenses already in line to be cut. They are reducing overhead spending, operating expenses. They have some pilot programs that were solely focused on care delivery and outcome that were, although great for the residents and the hospital partners, won't probably need to be postponed. But it is mainly an expense story and a focus on expenses, and there is -- they will continue to improve Q-Mix. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. Do you have a sense of just how large those cuts could be? I mean, Sunhill [ph], they kind of give a sense of how big it could be. Is Genesis willing to give a similar type of outlook?

I think we're not going to get into all of the expense cuts and how we're going to do it. That's for George and for us to worry about. There are always ways for a skilled nursing to rightsize everything they're doing. It's been part of the 40- or 50-year history of skilled nursing. So just know that, that team is very capable of driving great Q-Mix improvement and to be able to create operating efficiencies. Omotayo Okusanya - Jefferies & Company, Inc.: Okay. So theoretically, could you give a sense of where do you think coverage ratios could go after that?

Well, coverage ratios, Scott gave you already, based upon repositioning of the portfolio and even without the move in Q-Mix. So it's already built into... Omotayo Okusanya - Jefferies & Company, Inc.: Okay. That's built into that number.

[Operator Instructions] Your next question comes from the line of Karin Ford with KeyBanc Capital Markets.

Just one quick one. Do you expect any loss of coverage in your senior housing portfolio as the result of the CMS change?

No, I don't think so.

At this time, there are no further questions. I would now like to hand the call back over to Mr. Chapman for his closing remarks.

Thanks very much. Let me close by reiterating that this has been probably the most successful quarter for investments in our company's history and probably in general. It has been a tremendously successful time for us. We believe we built a best in the industry portfolio, and we're able to deliver outstanding growth for our shareholders for many years to come. And I think we continue to be poised to capitalize on tremendous opportunities in the marketplace. So with that, I'll thank all of you for participating and remind you that Scott and his team are available for some follow-up questions, if necessary.

Thank you. That does concludes today's Second Quarter 2011 Health Care REIT Earnings Conference Call. You may now disconnect.