Welltower Inc. (WELL) Q3 2011 Earnings Report, Transcript and Summary

Stephanie Anderson - Chief Acquisitions Officer of Senior Housing Jeffrey H. Miller - Executive Vice President of Operations and General Counsel John T. Thomas - Executive Vice President of Medical Facilities Scott A. Estes - Chief Financial Officer and Executive Vice President Charles J. Herman - Chief Investment Officer and Executive Vice President George L. Chapman - Chairman, Director, Chief Executive Officer, President, Member of Planning Committee, Member of Executive Committee, and Member of Investment Committee

Bryan Sekino - Barclays Capital, Research Division Derek Bower - UBS Investment Bank, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Jana Galan - BofA Merrill Lynch, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Michael Odell - Medlife Richard C. Anderson - BMO Capital Markets U.S. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division Robert M. Mains - Morgan Keegan & Company, Inc., Research Division Todd Stender - Wells Fargo Securities, LLC, Research Division Nicholas Yulico - Macquarie Research Karin A. Ford - KeyBanc Capital Markets Inc., Research Division James Milam - Sandler O'Neill + Partners, L.P., Research Division Jeff Theiler - Green Street Advisors, Inc., Research Division Unknown Analyst -

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

Thank you, Brooke. Good morning, everyone, and thank you for joining us today for Health Care REIT's Third Quarter 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 news release and from time to time in the company's filings with the SEC. I would like to now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT, George?

Thank you, Jeff, and good morning. Health Care REIT's relationship investing strategy continues to produce strong financial results. In the third quarter, we generated year-over-year FFO and FAD per share growth of 13% and 7%, respectively. We have increased our 2011 FFO guidance and now expect growth of 10% to 11% this year. We believe that this earnings growth together with the acknowledged high quality of our portfolio have both contributed significantly to share-value creation. The portfolio continued its strong performance generating same-store NOI growth this quarter of over 4% and our relationship investing strategy resulted in investments of $650 million in the third quarter and a record $4.8 billion year-to-date. We continue to see a healthy pipeline of private-pay senior housing assets concentrated in global -- in coastal markets and larger MSAs, as well as MOB investments affiliated with leading health care systems. Nearly all of these investment opportunities are derived from our long-standing industry relationships. The third quarter data released by the National Investment Center, NIC, last week affirms the positive trends and resiliency of our industry. The reports showed that industry fundamentals in senior housing occupancy and pricing are strong despite a volatile economic climate. Overall, improvement was particularly notable in key metropolitan markets. Markets that represent a substantial part of our senior housing portfolio. These encouraging industry trends aligned with a overall positive performance of Health Care REIT's senior housing portfolio again this quarter. The Health Care REIT sector generally has been a very steady performer during the current challenging macroeconomic conditions. Historically, Health Care REITs have produced stable growth and steady cash flows even in highly volatile markets. Current demographic trends, limited supply and favorable access to capital are contributing to a positive outlook for the industry. The consistency of cash flows, portfolio diversification and excellent liquidity are providing an opportunity for long-term value creation with less risk than other asset types, an appealing option for many investors. Our company has demonstrated this consistent growth and value creation through its relationship network. We define our unique relationship investing strategy with the words relationships, results and returns. These words make an important point. Specifically, they connect the dots and explain how our company's relationships create meaningful portfolio results and, ultimately, generate shareholder returns. Now I'll walk you through the success of this quarter using that strategy. First, relationships. The nearly $650 million in gross investments we closed this quarter are reflective of that relationship investing strategy. The majority of investments for the third quarter are acquisitions, at an average yield of 7.3%, in primarily high-end, private-pay seniors housing and medical office building investments. These premier investments are the result of existing industry relationships and further strengthen our industry-leading portfolio. And I should add that, I believe this quarter's investment volume, in a particularly difficult overall environment, speaks to the consistency and predictability of the HCN relationship-based approach to investing. As mentioned during my introduction, even in the current climate, we have a healthy pipeline of investments. In senior housing, we are pursuing newer, high-quality properties located in strategic geographic markets. In our senior housing operating portfolio, we now have the youngest average SNH among our peer group, and 90% of the properties are located in the top MSAs for East and West Coast markets. We are also focused on operators that are generating strong financial results, including steady cash NOI per unit. For MOBs, we are focused on newer, larger properties affiliated with leading investment-grade systems, and we are pleased that our stable of partners is strong and growing. In fact, through our relationships, we have built the most balanced and diverse operator base in the industry, which is generating additional investment growth, especially in a climate of industry consolidation. Next on results. Our relationships have created a foundation from which strong financial results are built. Recent investments have created a high-performance, high-quality portfolio. Our third quarter investments were primarily private pay, high-end senior housing and medical office building assets. All of these contributed to the quality of our portfolio. We are particularly pleased with our new 308 million double -- triple-net lease partnership up with Chelsea Senior Living, a highly respected and quality provider in the Northeast. This transaction includes the acquisition and leaseback of 10 combination senior housing communities in New Jersey and New York, with a 2012 lease rate of approximately 7%. Our partnership with Chelsea is a continuation of our strategy to partner with premier operators with high-quality assets, and this investment also contributes to our increasing presence in East Coast markets. Information relating to the Chelsea transaction is posted on our website. In addition to the Chelsea transaction, this quarter's investments included $146 million for 630,000 rentable square feet of medical office buildings, and these high-quality medical office building assets are primarily affiliated with health systems and are over 90% occupied. We continue to see strength in our portfolio diversification with no one asset type representing more than 30% of the investment balance. We are focused on the growth of our assets supported by private payor sources, as evidenced by most of the investments made this quarter. Our private pay mix within our portfolio is nearly 70%, which we plan to increase to over 80% in the next few years. With respect to Genesis, we continue to be impressed by George Hager and his team. George presented to our Board of Directors last week in New Jersey and reported the continued successful execution of the Genesis business plan. They are making appropriate adjustments necessary to accommodate reimbursement changes. And with George's geographically-clustered portfolio and his team's well-deserved reputation for quality care, we remain very excited about our partnership and our ability to help George and his team further develop Genesis' post-acute platform that is a critical component of the evolving health care system. Now returning to our portfolio update discussion, we are pleased to report that our MOB portfolio is now over 10 million square feet and maintains 93% occupancy, the highest in our peer group, and our retention rate was 84% during the last 12 months. We also continue to pursue our coastal concentration strategy, where a dominant presence in these markets creates numerous strategic advantages. And as it relates to the portfolio, generally, 75% of our total portfolio is located in attractive East and West Coast markets, or in one of the top 31 MSAs, and finally, our total portfolio is producing solid same-store NOI growth for the quarter of 4.2%. So in sum, our portfolio composition is highly reflective of our strategy and is leading the industry in a number of areas. We continue to solidify existing relationships and form new partnerships with the best senior housing operators and health systems in the marketplace, creating relationship-based future growth opportunities. And now returns. The most important component of our strategy is the way that we are creating reliable and meaningful returns for our shareholders. In the third quarter alone, we generated significant earnings growth, and FFO increased, up 13% from the third quarter 2010. We have access to reasonably priced capital, a strong balance sheet and conservative payout ratios. Based on the strength of our existing portfolio, confidence in our future pipeline and earnings growth potential, we have increased our normalized FFO per share guidance to 10% to 11% growth over 2010. And in addition, our board increased our 2012 dividend payments to a level in excess of 4% over 2011 payments. I'd now like to take a moment to welcome a new addition to Health Care REIT's Board of Directors. As recently announced, Dan Decker has been named to our Board. Dan has nearly 20 years experience in the senior housing industry, including playing a key role in over $2 billion of investments. And Dan's prominent leadership and extensive experience in the industry will add tremendous value to the company's long-term goals for growth and shareholder returns. Additionally, I'd like to highlight a recent corporate governance change enacted by our Board of Directors. On October 27, our Board of Directors approved declassifying board membership. So beginning at the May 2012 annual meeting of shareholders, directors who are nominated will be elected to one-year terms. Our board's decision is consistent with Health Care REIT's continued focus on strong perfect governance and best forward practices. In closing, Health Care REIT's relationship investing strategy and high-quality portfolio continue to create shareholder value. Our year-to-date total return of nearly 14% exceeds our industry peers. We are also proud of the 60% total return we delivered to shareholders since inception in 1970. We have built a portfolio that is producing solid same-store NOI growth based upon an industry or an investment strategy that is providing ongoing opportunities that strengthen and diversify our industry-leading portfolio. Most importantly, we are generating strong financial results and delivering value to our shareholders. With that, I'll now turn to Scott Estes, our CFO, for a brief financial and portfolio overview. Scott?

Thanks, George, and good morning, everyone. As George discussed, we continue to add attractive new investments our portfolio, having now completed a record breaking $4.8 billion of growth investments year-to-date through September. Our portfolio continued to perform well in the third quarter highlighted by blended same-store cash NOI growth of 4.2%. Our strong same-store performance and success on the investment front generated another strong quarter of FFO and FAD per share growth. While our confidence and our future growth potential enabled us to announce a dividend increase earlier this week. At this point, our portfolio diversity, by operator and a rent payment coverage levels are main among the strongest in the sector, providing greater certainty that we will continue to be paid our rents to the current government reimbursement cycle. Finally, our balance sheet remains strong and we have ample liquidity with over $1.7 billion of line capacity and cash on hand at the end of September. Turning to the details of the quarter, regarding investment activity, as George mentioned, we completed $644 million of growth investments during the third quarter. This consisted primarily of $569 million of acquisitions that have a blended yield of 7.3%. The most significant of these investments was our $308 million Chelsea Senior Living transaction detailed in our press release and on our website. The other significant acquisitions were 2 medical office building portfolios affiliated with health systems for combined total of $124 million and a blended average NOI yield of 7.3%. In terms of dispositions, we sold 3 smaller properties and had a few small loan payoffs totaling a combined $16 million, bringing dispositions year-to-date to just under $300 million. Based on our fourth quarter disposition projections, we have increased our disposition guidance for the full year slightly to $350 million, as we continue to recycle capital into new assets to further enhance the quality of the portfolio. All around, we are pleased with another excellent quarter on the investment front from the company. Turning now to portfolio performance, as you may have noticed we changed the appearance of our supplement a bit this quarter, this new format facilitates a more automated reporting process for us internally while streamlining the presentation of the data for the investment community. In terms of our portfolio, first, our stable of seniors' housing and care portfolio continues to perform in line with expectations. Our seniors' housing triple-net lease payment coverage stands at a solid 1.4x, while occupancy remains 88%. We also generated strong 4.4% year-over-year same-store cash NOI growth within the seniors' housing triple-net lease portfolio during the third quarter. Now I'll provide a brief update on our skilled nursing portfolio including some comments regarding Genesis. We continue to believe that skilled nursing facilities are the most efficient cost-effective settings for providing health care services. Our skilled nursing portfolio remains focused on a relatively limited number of key relationships with strong operators. To that point, including Genesis, nearly 90% of the EBITDAR in our skilled nursing portfolio is generated by our top 7 skilled nursing operators. And importantly, as a result of adding the Genesis portfolio occupancy of 91% to the portfolio average, our overall skilled nursing occupancy increased a full 2.5 percentage points in the quarter to 88%. Last time our skilled nursing portfolio was at this occupancy level was 1995, or 16 years ago. Our most recent cash flow coverage is listed in the supplement for the trailing 12 months ended June 30 with a strong 2.3x. This includes one quarter of the Genesis portfolio impact. Annualized for the full impact of the Genesis portfolio, our current skilled nursing portfolio coverage stands at 2.1x. And our latest view regarding Genesis' operating performance remains unchanged from last quarter's call. Specifically, we continue to expect the company's corporate level fixed charge coverage to be approximately 1.3x to 1.4x in calendar year 2012. There's also, obviously, been a lot of discussion of late regarding an individual company's ability to adapt to the current skilled nursing operating environment, and we think, really cutting through it all, we believe there are 3 distinct factors which differentiate our Genesis investment. First, they have a geographically-concentrated portfolio in the attractive Northeast and mid-Atlantic markets; they have greatly enhanced their right key [ph] platform, which allows for optimal therapy utilization and labor efficiency; and probably most importantly, they have the ability to significantly improve their quality mix over the long-term. As a result, we do remain highly confident in Genesis' continued ability to pay our rent. As this point, I'll provide a brief update on our seniors' housing operating portfolio which is comprised of our RIDEA partnerships. The blended occupancy across our 4 operating portfolios increased 30 basis points versus the prior quarter to the current 86.6%. In addition, our same-store operating portfolio NOI for the third quarter increased 8.2% versus the comparable quarter last year, driven by a combination of a 70-basis point occupancy increase over a 4% revenue per occupied unit growth and a slight expansion in margins. Our operating portfolio continues to perform in line with expectations and we remain comfortable with our NOI growth expectation of 4% to 5% over the long-term. Moving now to the medical facilities portfolio, our medical office building portfolio performed well in the quarter with historic [ph] and occupancy remaining at 93.3%. In the trailing 12 months retention at a solid 82%. Our MOB portfolio generated same-store cash NOI growth of 1.7% for the third quarter. In regards to our hospital portfolio, cash payment coverage remains strong at 2.6x, and we again experienced solid 3.7% same-store cash NOI growth in our hospital portfolio during the third quarter versus last year. Our Life Science portfolio also continued to perform better than underwritten expectations. For the first time, we began reporting same-store results on this portfolio this quarter, and are pleased to report same-store our NOI growth of 6%, which was driven by our first lease renewal in 2011 at rates roughly 40% above their previous levels. Turning last to financial results, we reported normalized third quarter FFO per share of $0.89, up 13% versus last year's quarter; and normalized FAD per share of $0.79, up 7% versus the comparable quarter last year. Quarterly performance was driven by the internal growth generated by our existing portfolio, combined with our success investing profitably throughout the year. We recently declared the 162nd consecutive quarterly cash dividend for the quarter ended September 30 of $0.715 per share, representing at 3.6% increase over the same period last year. In addition, the Board of Directors approved an increase in our 2012 quarterly dividend rate of $0.74 per share, or $2.96 annually beginning with the February 2012 dividend payment. As George mentioned, our 2012 dividend payment rate represents a 4% increase over dividends to be paid in 2011. In terms of third quarter capital activity, we issued 669,000 shares under our dividend reinvestment program, generating over $31 million in proceeds. And we issued 743,000 shares through our aftermarket program, generating an additional $37 million in proceeds. At the end of the quarter, we had over $1.6 billion available on our $2 billion line of credit and had an additional $136 million of cash and cash equivalents. At the end of September, our debt to undepreciated book capitalization stood at 46.6%, while secured debt to total assets was 13.6%. Our trailing 12-month interest and fixed charge coverage remains solid at 3.1x and 2.5x, respectively, while net debt to adjusted EBITDA slightly over 6x. Over the longer-term, we will continue to look to drive debt to undepreciated book capitalization down toward the 40% level and net debt to EBITDA to a range of 5x to 6x. Finally, overview of our updated 2011 guidance in assumptions. Based on the strength of third quarter results, we are increasing our FFO guidance by $0.035 at the midpoint to a range of $3.88 to $3.43 per share, which represents strong year-over-year growth of 10% to 11%, and our updated FAD guidance of $3.03 to $3.08 per share also represents solid growth of 78% versus last year. And as a final reminder, our earnings guidance does not include any investment beyond what we've announced through the third quarter. While our disposition guidance increased slightly to $350 million for the full year, of which $298 million has been completed through September. That concludes my prepared remarks. And I think operator, we'd like to open up the call for questions, please.

[Operator Instructions] Our first question comes from Jana Galan with Bank of America.

I understand you primarily focus on your relationships to drive investments but I was curious what you are seeing being marketed right now and how much in each of the different asset classes?

There are a number of decent-sized packages in both senior housing and the MOB space but fewer than say a year ago. And I think there's probably less of a tendency to go to market. People seem to be linking up with favored partners more than even at least a year or 2 years ago. John, you want to comment on MOBs? John Thomas?

This is John. There's been very few hospital modernizations over the last couple of years. There's a package out now and Scott's telling it [ph] -- everybody's very familiar with it, you know, not a very large package. So most of our attention is to our relationships and building new relationships and that's where most of our pipeline is coming from.

Chuck Herman, do you want to comment a bit on our senior housing?

Yes. And I think our operators are generating some decent investment volume, a lot of off-market transactions that are coming our way because of that, but relatively few large packages, as George stated.

And I think that after the third quarter acquisition activity, the senior housing operating NOI is now maybe around 14%. I'm wondering if you've -- where you kind of think that should be in your portfolio longer-term?

Jana, it's is Scott. That is correct. It's about 14% at this point. And I think we would consistently say that we'll probably continue to have opportunities to grow with our existing operators and continue to look at additional idea investments opportunistically. But that's probably a good place to think it would be for the intermediate-term, somewhere in the mid-current 14%, maybe up to 20% level.

Your next question comes from Jeff Theiler with Green Street Advisors.

I structured your Chelsea Senior Living deal as a triple-net lease, previously you've been doing a lot RIDEA stuff. Can you talk a little bit about -- is there something about the portfolio that lends itself to a triple-net or is it -- what's your thinking behind structuring?

Chuck Herman?

We structured that transaction -- we felt that it aligned with the best interest of both parties. So that's what we agreed to. RIDEA does not fit every operator nor is it the desire of all parties. So we have options in how we can structure. In this particular case, we felt triple-net lease was the appropriate structure.

It's not a change in philosophy necessarily going forward. It just happened to be the right one for this...

Jeff, this is George. I think that the better way to look at RIDEA versus net lease is exactly as Chuck indicated. That it could be the portfolio is very attractive for us to do, RIDEA, but perhaps the operator doesn't want to do it. Other operators came to us in part because they wanted to do business with us, but they -- others like to do deals as joint ventures. And so it isn't really the choice alone for the capital partner. It is a partnership. And I think it just -- it's just situational and in this case they elected to do a net lease and we're just fine with that. It adds significant quality and size to our very strong focus in the Northeast.

Makes sense. So the cap rate is a little bit lower, I think, than we've seen on recent triple-net deals. Is part of that due the mark-to-market rent structure, years 4 and 9? I guess can you walk me through the mechanism of that?

Sure, Jeff, it's Scott. Yes, I think this investment has, I would call, higher than average increase, there's a part of it, in terms of the bigger picture. And the short of it is, through 2015, the rents would increase at a fixed rate of about 2.6% per year, on average. And then at that time, there'll be a fair market value reset but the increase will be no less than 3.5%. And really from that point, through 2015 through '19 it grows at the rate of at least 3% a year. So in general, you have some benefit from the fair market value resets and probably on average with increased rents we think 3% a year.

Okay. I guess and then lastly, I noticed -- I guess last quarter, you stopped reporting EBITDAR coverage and kind of focused on cash flow coverage of EBITDARM, with the M. I just want to get your thoughts around the thinking behind that. I think that's a metric that a lot of people look at, the EBITDAR coverage and especially when you're comparing portfolios, like Genesis quarter to quarter, that kind of was initially talked about as an EBITDAR coverage metric, just kind of your thinking about taking that out of the supplemental.

Sure, Jeff. It's Scott, I'll answer that one. Frankly, we find there's a lot of inconsistency in how coverage is reported across our sector, and management fees are subordinate to our lease payments and I think again they're also been imputed inconsistently throughout the industry, so our view is we'll continue to provide the cash flow coverage and help you guys talk about if you want to imply a management fee you can get to and after management fee number, but that was in essence our thinking around doing that.

Your next question comes from Derek Bower with UBS.

George, before you talk a lot about the pipeline I guess for senior housing and MOBs, but is there anything in the skilled nursing front that you're currently underwriting? Or do you think the market is more of in a wait-and-see mode depending on what comes out of the Congress in the near future?

I think it's a little slower right now. We will look at individual transactions, either acquisitions or a development for one of our -- what is it, 6 or 7 key operators to help them. But you're right, in some sense, is that until there is a little bit more clarity, it's a little more difficult to underwrite it at this moment. So everybody's going a little more slowly than the past. But I echo what Scott said, we think that despite a very unfortunate decision about the White House to take away too much reimbursement away that skilled nursing is by far the most effective delivery system for care in the whole system and will be favored over time and will be very successful, very successful and key part of the health care delivery systems for many years to come. So I think we're just waiting for clarity. And then we look forward to, as I said in my comments, helping George and the rest of the Genesis team, and for that matter other of our key operators build out a system that really works in the evolving health care delivery system.

On the balance sheet front, really given the widening of spreads in the unsecured market, I'm guessing that it's unfairly an avenue you want to pursue. [indiscernible] So how do you think about your funding needs over the next 6 to 12 months on the right-hand side of your balance sheet with respect to [ph] that are coming due as well as your developments on any acquisition?

Hey Ross, it's Scott. You're breaking up a little bit but it seems like you're asking about just unsecured and secured pricing and it -- prospects on financing outlook going forward, so I'll give a quick overview that. Let me know if I miss anything. I guess the advantage for us is I think we have a lot of flexibilities. We think about our capital needs and that's why we put a $2 billion line in place. And I think that's the most important. As it relates to debt pricing, been a lot of movement in that market obviously as well as the overall markets I would take a current new tenure unsecured note for us probably in the 5.75% to 6% range based on current treasuries and spreads in pricing. And the secured debt market, basically, we have -- I think we have some availability in that bucket, you know, 13.6% currently. But again, we tend to assume debt that's already on properties that we acquire. And again, in terms of equity, as we've said, I think over the longer-term, we do have slightly more conservative leverage goals, as I mentioned in my prepared remarks, closer to 40% debt to undepreciated book in 5x to 6x net debt to EBITDA, so you'd expect us as always to be looking at that market, too.

And can we assume that the converts that are coming up here in a month or so are going to get taken out on the line?

I guess you could, although we put out a notification there's $126 million of convertible debt that's puttable to us on December 1. The reality is those are actually in the money. The conversion price is, I think, about $47.10 or so. So we have actually $5 in the money. And at least our expectation, if dependent upon our stock price, at this point is they would probably remain outstanding, but we will wait and see there.

Your next question comes from James Milam with Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Just a quick follow-up on the capital question. It was a nice increase in the dividend. I'm just curious how you guys on the board are thinking about increasing that over time, and if you're trying to -- I think you could have increased it more, but are you trying to retain a little capital going forward? Or what do you think about in terms of payout ratios?

George, do you want to do that?

It's always a balancing act. And to some extent, we try to lower our payout ratios a bit, and we're making a lot of progress there. And unlike a lot of other of our colleagues, we see a great pipeline. And so we have plenty use for the money as well. So it is always a tough balancing act that I think we came up at the right place, but people can differ. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Is there any kind of -- I mean, obviously, there's a taxable income floor [ph] , but is there sort of a minimum payout ratio that you guys would want to exceed over time or a minimum growth rate that you would look at?

Right now, we're about where we want to be. We might drive it a little lower. This economy and attitudes of people swing so dramatically from -- we're starting to feel like the market wants to go up, and then we have a REIS [ph] Situation that comes in, everybody gets conservative. So I guess we're right now sort of erring a bit on the side of being somewhat more conservative in how we're running our balance sheet and how we're looking at our liquidity. But it wouldn't surprise me in the least. I have a totally different conversation in our next earnings call. So it just takes a hell of a lot of judgment right now and a balancing act to run any public company. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay, great. And then my second one, it looked like CSU did a couple of -- bought a couple new assets, did you guys participate in that? And then if not, can you just remind us what the obligations are of your operators to show you deals, and for you guys to participate in any transactions that they do?

They bought -- with the Capital Senior Living, they -- public company, they've got the ability to go and do assets -- do deals outside of our relationship. And in this particular case, they wanted to grow one balance sheet versus off-balance sheet. We still have an excellent relationship with them and expect to be continuing to do business with them over the long term. Each relationship we have is different. So a majority of the time, we have the right of first option, the right of first refusal on new deals and have lines of credit with many of our line -- leased lines of credit with many of our operators. So that's why we tend to see a lot of business. And when you're focused on relationships, that drives volume our way.

Your next question comes from Bryan Sekino with Barclays Capital.

I know some of the RIDEA assets that you've recently acquired have a fill-up component to them. Can you kind of give us some perspective on how the operating assets progress in a lease-up perspective?

Sure, Bryan. I guess, I would just generally say they're doing well. I think the -- a few of the -- it's actually only about 6 buildings. So of the 99 total, 6 are in aggregated fill-up. The portfolio is doing well. They continue to fill. And that's actually, I think, a big benefit when you think about our overall NOI growth potential and why over the last 2 quarters, we've generated the 12.6% growth last quarter and 8.2% growth this quarter.

Stephanie Anderson is running our RIDEA platform. Stephanie, any other color?

Yes. I mean, overall, our operators are doing really well. There's so many different levers that they can pull to drive occupancy. And the lease-up continues much as you would expect with all the concerns in economy. They just continue. We continue to lease-up and have positive momentum.

Your next question comes from Karin Ford with KeyBanc Capital Markets.

George, just wanted to follow up on a comment you made earlier that given some of the volatility in the capital markets and in the economy today, you might be running your balance sheet a little bit more conservatively. Have you changed your return expectations on new investments at all as a result of that as well? Or perhaps maybe your growth assumptions on things you're looking at underwriting for future acquisitions?

Karin, right now, we are intending to get most of our new transactions from existing customers, and we're doing the best we can to accommodate them. We are clearly looking harder at our returns. And to the extent new parties come to the table, we're probably being somewhat more selective, careful in terms of giving them commitments. But we try to keep everything in play that we can that looks good to us in terms of reasonable returns going forward and building relationships. But at the same time not disadvantaging anybody in the event that the capital markets turn down. So again, I just sort of reiterate what I said earlier, it's a very interesting balancing act for all of us running this company and, for that matter, our colleagues and the rest of the Health Care REITs. The only thing I'd also add is that all of us are doing pretty well in the Health Care REITs and have probably better access to capital and better opportunities in a better industry in a sort of a choppy economy than virtually any other property type.

Second question, just appreciate the update on Genesis -- your pro forma Genesis coverage for 2012. Does that incorporate an additional 2% Medicare cut under the automatic plan that could come down the line? And if it doesn't, have you run a sensitivity on what that impact might be?

Scott?

The numbers I articulated on the call really include basically what's known at this point, including their assessment of the therapy impacts inclusive of our full rent bump and net of their estimate of cost mitigation. To your specific question about the potential for the 2% sequestration cut, it's not included. But again, that's unknown. It would not go into effect until January of 2013, and it would be again a net cut so if there were any market basket increase, it would be net of that. The sensitivity answer is basically still the same for us as it's been. Each 1% reduction in overall Medicare rates. If you hold all else equal, it translates into about 3% to 4% of an impact to our coverage. Again, so 2% would obviously be roughly 68 basis points. But again, I would importantly reiterate is there could always be some netting out of some cost savings.

Helpful. Just final question. What was the pricing on the dispositions that you sold in the third quarter and what you've got teed up for sale in the fourth quarter?

The dispositions in the third quarter were assets that had been in our portfolio a very long time and were very small amounts. There was only $16 million in aggregate. I think the blended average was 8.5%, 9%. I think a fair estimate for the last $50 million in our guidance would be something in the range of, say, 10% probably of a disposition yield.

Your next question comes from Jerry Doctrow with Stifel, Nicolaus. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: A lot's been covered. I just have a couple of quick things. Shifting to kind of MOBs, it looked like you saw a little bit of occupancy slippage sequentially. One of your competitors reported the other day, noted some significant rent rolldowns. So I was just curious if you can give a little color on the MOB and whether there's a rolldown that we should worry about.

John Thomas?

Yes. Jerry, this is John. The -- we saw a very slight bump, but it's more of a timing on the occupancy. And we expect to finish the year making that up and strong. So far this year, we're a little ahead of budget on tenant rents and roll ups or increases, so it's -- we're still averaging 1.5% to 2% on renewals, and retention rates continue to be in the in that 80% to 85%. So we wouldn't expect any meaningful rolldown. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: And then construction, I went through some of the construction material you had on the website today. Clearly, you seem to be comfortable with construction remaining a decent chunk of your business. I was wondering if I can get a little color on the CCRC lease-up and just your thinking about construction, how much you're comfortable doing, that sort of thing.

Jerry, maybe I'll start and try to answer. It's Scott. Yes, we still like a selective construction. It's pretty small part of the aggregate portfolio right now. I believe we only have about $450 million of total projects underway. I think most importantly, we're focused on a triple-net lease senior housing assets with existing operators that would likely roll into master leases. And the other main focus would be, largely, almost in many cases almost 100% pre-leased medical office buildings. So that is the majority of the type of project that we believe are low risk and get also nice returns in terms of the additional construction that we may do. In terms of your question about the CCRC and entrance fee fill-up, they actually progressed pretty well this quarter. The entrance fee component of those assets increased from 54% to 56%. And I would actually point out one nuance in the portfolio in terms of what we report in the supplement. The rental occupancy is reported at 82%. The number was actually down if you just compare supplement-to-supplement, but that was because we added over 100 new units this quarter. So the previous quarter's number existing portfolio would have increased about 91.5%, I think it was, prior to the effect of adding some new units. So -- and we added those because a lot of our rental component of those facilities actually had a wait list. So as we mentioned before, we've added some new units, which is a positive, because we needed some additional capacity. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: And just in terms of how all that sort of plays out to any future rent bumps. I mean, if we're assuming sort of a continued, sort of a steady climb on the entrance fee, I mean, when might you bump rents again? Or where does that stand?

Well, we're looking at that right now, Jerry. We hope to have another rent bump of perhaps the same magnitude as last year. And we're going slow on it. The rental's doing great. The Health Care is doing great. And the entrance fee is sort of just chugging along, making progress in a very choppy economy. So it's going to be very deliberative -- it's going to be modest, and we're just going to keep moving along. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: And probably something like January 1?

Probably.

Your next question comes from Nicholas Yulico with Macquarie.

Looking at the senior housing construction portfolio. I see there's a good chunk of the units being dementia care. And I'm just wondering how that affects your underwriting since dementia wings are obviously very important to the ultimate value of the facility, but tend to be more costly for an operator to run.

We've had great luck with investing in dementia care. It's a great driver of value in our sector, and it's been very solid covering parts of our portfolio. We like it a lot, and we're doing business with people who can provide either the full continuum through adding dementia care or folks that are particularly skilled in providing dementia care, maybe higher-end dementia care, such as Loren Shook at Silverado. So we're very pleased with our investments in that area.

Okay, great. And then, I was wondering if you have actually some stash you could share on what percentage of your existing senior housing properties either have dementia care units, whether you had sort of a percent of beds number or even just a percent of total properties that have some portion of dementia care.

I think probably we should get back to you on that.

We need to research that. It's obviously -- we don't have that one right here at the table.

Good question. We'll get back to you on that.

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

Just getting back to the Genesis fixed-charge coverage you identified and reiterated at 1.3x to 1.4x post some of the known issues. One of the known issues you mentioned was the cost savings that they're looking to incorporate. But when you talked about them, you talked about quality mix improvements, and you talked about geographical footprint, but I didn't hear anything about specifics on where they could become more efficient from a cost perspective at the property level. Can you share some of that color?

We're not going to go to all of their cost savings. That gets into a lot of very -- a much private information for George. But obviously, there are ways to deal with travel, with wages, bonuses and what have you. And we are very much aware of the fact that George and his team have been very aggressive in terms of resolving these issues with the least effect on their staff, which is, I think, one of the best, if not the best, in that sector. Scott, do you want to add anything?

I will comment just briefly and let Stephanie make a comment as well. But I would say, Rich, I'd really still get back to, they're doing a great job and doing everything they can do on the cost front. I really think the most important differentiator is the quality mix over time opportunity for Genesis. I mean, again, we didn't mention it on this call, but the ability to move from the low 50s up to potentially 60% to 65% over the longer term, really, is an important opportunity. We calculate that each 1% improvement in quality mix would increase their coverage by 6 basis points. So obviously having that type of an opportunity, I think, is a real important part to not focus so much on all the moving parts near term, but really a long-term opportunity at Genesis. Stephanie, do you want to talk about anything in particular?

Sure. Rich, just to give you kind of a more broad highlight on areas that are of focus is they've really spent some time talking to their long-term vendors, as well as their employees and other partners and are setting expectations of cost-sharing, and they've been very successful in that. They are continuing to focus on delivering quality care, and that won't be -- continue to be their main focus. And there will be overhead savings at the corporate, as well as the utilization of technology and the therapy delivery. And just workflow benefits that they have with bringing people in and out of their therapy gyms. So there are a lot of things. They have a list of opportunities and really just making the entire quality of care even better that they'll be focusing on.

Okay. So let's say, a year from now, it's 1.35x fixed-charge coverage for Genesis. I mean, where are you comfortable -- I'm assuming you would hope to see that number go up. I mean, where are you comfortable in terms of coverage for that -- for the quality of that portfolio?

We're comfortable at Genesis, HC or Humana Care, our life care centers and the other quality senior -- skilled nursing operators can handle this situation again, like they've had handled it many, many times. We obviously would like to have our skilled nursing after management fee coverage more like $1.5 billion or so. And so we're not happy. No one's happy about what we think was cutting into muscle and bone by the White House. We think it's a mistake, but we have the ability to get back up to our desired level and above it in the very near future.

Okay, that's fair. And then, just big picture question for you, George and whomever. You guys obviously continue to be big-time investors and buying a lot of assets through your relationships and all the rest. Do you worry at all about becoming almost too big? Are you anywhere near that in terms of, from the standpoint of economies of scale or maybe that's not the right word, but it becomes harder and harder to grow the company, and it becomes this big boulder that keeps rolling down the hill, getting bigger and bigger, harder to grow. Do you ever want to say, "Maybe we should just sit back for a couple of years and enjoy the size of the company that we've done so far in grow off of that base as opposed to getting making the base bigger and bigger."

Rich, we've never grown just to become larger. And we continuously dispose of properties, even some that are at 9% and 10% rates because we think some of those properties will not be as attractive in the new health care and senior housing environment. So we're always very aggressive about managing our portfolio. This just happens to be a period in which the health care REITs have wonderful access to capital, equity and debt at very attractive rates. And there are -- is consolidation going on in the operator worlds, and we're going to run hard. And we're doing very well vis-a-vis our closest competitors in terms of getting the best and the brightest. And I think it's just one of those time period. Just wait a year or so when a lot of the packages are gone and then we will have the ability to do that $1.5 billion to $2 billion a year with our relationships. And there won't be that many transactions out there. So it's going to be a very different world in a year or so. It's just a very unique time period.

Your next question comes from Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: I was just wondering if you could walk through some of the detail behind how you got to the 4.5% or 4.4% top NOI growth on the same-store -- or triple-net senior housing portfolio?

Sure. Most of the -- I think you're referencing the 4.4% same-store senior's housing triple-net NOI growth. Okay. There was some benefit of, really, 2 factors, some catching up this year in terms of rents where we didn't get the full increase or in the prior year. And the other factor was the increase in the entrance fee properties this year versus last year helped to get us a little bit above what you'd probably expect to see in more normal, call it, 2.5-ish percent rate of growth in that portfolio. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. So the entrance fee component, that specifically ties to the deferrals -- the rent deferrals that are coming back now?

Yes.

Your next question comes from Ureil Gioti [ph] with Morgan Stanley.

It seems overall that the RIDEA portfolio is performing well despite the macro headwinds that are in the economy. Do you believe, though, that at any point in this macro headwinds could cause RIDEA growth to soften below your expectations?

It's a sort of hard to answer that question because there'll be circumstances in the economy that could slow the growth in RIDEA. Yes, I mean, there could be. But we think we have a very reasonable balance between triple-net and RIDEA structures. And we've also -- so that we will manage any risk such as that. Also our experience, frankly looking back at our RIDEA partners is such that it's a very unlikely that the growth would go below at least the triple-net regular increase. But is it possible that we'll have slower growth? Yes. And probably the best way to look at RIDEA is sort of averaging out the rate of growth over a number of years and maybe even averaging out certain sections of the country that may be up while the others are down. So that's sort of how we present it to you. We think overall that we're going to get a better return on RIDEA over time than with the net lease.

Okay. And my other question is regarding one of the asset classes that you purchased this last quarter. You wanted the -- you purchased some hospitals. And looking at supplemental, you actually haven't gone into that space in a while. What motivated the purchase of hospitals in this quarter?

John Thomas?

Yes, this is John. That was with one of our existing good relationship clients. It was pursuing an acquisition consolidation within the LTAC space. And we've been with post-acute within patient rehab and LTACs, we've been concentrating on some life investments with our existing operators. And that particular operator is one of our better clients. So good assets, good pricing. And there's some opportunity from some upside of the company related to that transaction.

Some good coverage to it, John, I mean, projected to be in excess of cash flow coverage in excess of 2x.

Correct.

And where do you see hospitals overall in your portfolio like -- because you were saying earlier that you see RIDEA senior housing as being about 14%, 15% of your portfolio? Where do hospitals line up there?

In that kind of 5% and 10% total. And we wouldn't, we think, go lower into that range with growth. Again, mostly with selective clients that we already have or great new opportunities. We opened a hospital with Loma Linda this year. That's a -- that's been a great investment with the medical office building that opened completely full. So we're getting 9-plus-percent yields from a great institutional client like that. So pretty selective, and primarily with existing clients and just on the mix of assets in that range. And as Scott mentioned, we're focused on 2x to 3x coverage ratios.

Well, I think too, to add to add to that John, is that as we see the world evolving, it could be that our initial relationship with a hospital could be to do a hospital -- but where we think health systems are going is more toward outpatient facilities, more preventative care. And hopefully, these relationships that could start with a hospital investment will lead to a lot more of the modern post-acute or outpatient facilities that we really think are going to be the drivers in the future.

And I don't know if you mentioned this, or I might have missed it, but did you do provide the current key mix for the Genesis portfolio?

Scott?

Going into this year, I believe it has increased over the last 5 years from 47% up to about 53%. So generally, it's about that, 54% right now.

54%?

Yes.

Okay. And when you were looking in the Chelsea portfolio, were you thinking that this portfolio would fall, well, within your idea of synergies with the Genesis portfolio?

We think that -- I think we have total assets up in the Northeast right now, Northeast and mid-Atlantic, that is in excess of 40% of our portfolio, which is I think double the percentage of any of our main competitors there. And we do think that anytime we get up there with high-quality assets and assisted living or post-acute for that matter, even hospitals, that we're going to try to drive a lot of synergy. Our board meeting last week was in Philadelphia and in New Jersey where we met with Brandywine, actually had our board meeting at our Brandywine facility. George Hager was there from Genesis. And then we had a very nice meeting, a great meeting with Rich Miller, who's CEO of the Virtua System, the most profitable hospital system in New Jersey. So we are looking to begin that process of breaking down the silos, making Health Care senior housing more efficient. So, yes, we're going to be very, very aggressive in doing that. We're probably still 1 year or 2 away from moving toward full ACOs and bundled payments and things like that, but we're trying to help break down the silos and get people ready for it.

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

Can you talk about more -- a little more about the Chelsea portfolio? How did you source the transaction? And can you talk about the mix of IL and AL?

We've known the folks at Chelsea a number of years. Back when I was a consultant, we worked with them when they were starting out the company. So we've had a long history with these guys over the years. And our originating team has known them for many years when I was back a consultant, 10 buildings and expo markets in New Jersey and New York, all private-pay facilities, a little over 900 units, about 2/3 of them in the assisted living area and another 1/3 in memory care and IL side of the business. So I mean, real high-quality, excellent markets, tough to replace them. And like you've said, we've known them a long time and finally had the opportunity do business with them.

Are there any options to acquire existing facilities with Chelsea? Anything part of that deal.

We've been reviewing additional transactions with all of our operators. Right now, this is a majority of their portfolio. We've talked about other assets that they either have managed our have options on, and we expect to continue to grow the relationship over time.

Okay. And George, in your opening remarks, you highlighted the consolidation across several of the property types. It seems like skilled nursing would be a logical place to start. Can you comment on skilled consolidation or any other property types maybe you see for next year?

Well, I think that anytime you have sort of a shock going through any particular sector, some people are just going to hide and try to get through it. I always think that those kind of periods as periods of opportunity. So I think that will happen. I think we're still waiting for a little bit more clarity as people form relationships with one another, and then that can lead to more efficient pricing. So I would be surprised if consolidation would not occur.

Your next question comes from Rob Mains with Morgan Keegan. Robert M. Mains - Morgan Keegan & Company, Inc., Research Division: Just one question, kind of correlated to Todd's there. You talked about opportunities to add to the RIDEA portfolio that you've got. You've been holding steady at 99 facilities. Going forward, how -- what should we be expecting there if you're going to have? Would this be in the form of development with your partners or helping them acquire and integrate new facilities? Kind of just a sense of where that would go.

I think most of them would be new acquisitions, Rob, for now with very selective development within their particular region of focus, so strongly acquisition-oriented for at least the next year, some selective development. Robert M. Mains - Morgan Keegan & Company, Inc., Research Division: And I know if you can't write this in stone, but given that several of those portfolios are kind of geographically concentrated, I assume the acquisitions would be more on the smaller scale than significant change, or am I not thinking of it the right way?

Well, I think all of the existing acquisitions have tended to get somewhat smaller, okay? So I think you're generally correct, but there are some opportunities right now for, yes, $100 million, 500 million for some and -- but I guess that's tending to be a little smaller, given the size of our original acquisitions. But I still think they're significant and had too some of the cost efficiencies within the region for some of our top operators.

[Operator Instructions] The next question comes from Michael Odell with AIG Asset Management.

I was just hoping to revisit the discussion of utilizing EBITDARM and EBITDAR coverage. I understand the fees subordinate to lease payment. But in practice, have you ever actually received rent without a management fee being paid? And also on that note, when you underwrite deals, are you doing so on and EBITDAR or EBITDARM basis?

Mike, it's Scott. We do look at both. As we all know, we've provided both before and after management fees. So we have perspective, and we obviously, we can help you understand whatever numbers you want. So the inconsistency we found was causing a lot of confusion around the number. And there's intent to not help you understand what an after-management fee number is. So we'll continue to work with you to give you whatever you need.

Okay. Would you be able to provide those EBITDAR coverage numbers?

I don't have them in front of me right now.

At this time, there for no further questions. I will now turn the conference back over to Mr. Chapman for his closing remarks.

We would just, in closing, thank you for your participation and, again, indicate that Scott and his team will be available for follow-up questions after this call. Thank you.

Thank you. This concludes the conference. You may now disconnect.