Welltower Inc. (WELL) Q3 2012 Earnings Report, Transcript and Summary

Jeffrey H. Miller - Executive Vice President of Operations and General Counsel George L. Chapman - Chairman, Chief Executive Officer, President, Member of Planning Committee, Member of Executive Committee and Member of Investment Committee Scott M. Brinker - Executive Vice President of Investments Scott A. Estes - Chief Financial Officer and Executive Vice President Charles J. Herman - Chief Investment Officer and Executive Vice President Steven Mohr - Senior Vice President of Finance Jay Morgan - Vice President of Acute Care Investments

James Milam - Sandler O'Neill + Partners, L.P., Research Division Jeff Theiler - Green Street Advisors, Inc., Research Division Richard C. Anderson - BMO Capital Markets U.S. Wilfredo Guilloty - Morgan Stanley, Research Division Nicholas Yulico - Macquarie Research Philip J. Martin - Morningstar Inc., Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Thomas C. Truxillo - BofA Merrill Lynch, Research Division Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division Alex Fridlyand Todd Stender - Wells Fargo Securities, LLC, Research Division Tayo Okusanya Michael Carroll - RBC Capital Markets, LLC, Research Division

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2012 Health Care REIT Earnings Conference Call. My name is Brooke and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I will 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 2012 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 www.hcreit.com. We are holding a live webcast of today's call, which may also be accessed through the company's website. 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 it's projected results will be obtained. 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. George?

Thanks very much, Jeff. Our business model continues to hit on all cylinders. We completed $2.9 billion of investments today, including $1 billion in the third quarter. And since the beginning of 2011, we have made $8.9 billion of investments through the third quarter. And pro forma for the announced investments, including Sunrise in early 2013, the investments during the last year will total approximately $12 billion. The strength of our relationship investing program is also clearly demonstrated by the investments during the last 12 months as approximately $2.6 billion or 64% of the $4.1 billion of investments over that period came from existing relationships. We announced the agreement to purchase Sunrise in August of 2012. There were few opportunities, if any, to acquire a company of this scale and quality. The acquisition of Sunrise is a great fit for HCN. It provides us with an exceptional portfolio in the United States, the U.K. and Canada at an attractive yield with strong accretion. There are meaningful growth opportunities, including both long-term NOI growth and a pipeline of exceptional properties. Moreover, Sunrise has a national platform with a widely recognized brand, which positions it as a vehicle for a future consolidation of a highly-fragmented industry. Scott Brinker, in his remarks, will provide a detailed update on our Sunrise progress. Let me say this generally. We've accelerated the joint venture buyouts so that by the middle of 2013, we expect to own 100% interest in 115 Sunrise communities, and a minority interest in 10 communities for a total investment of $4.3 billion. Moreover, the overall cap rate will be approximately 6.5%, making the transaction very accretive to us. We also previously announced our agreement to sell the Sunrise management company to a group led by KKR and Beecken Petty, with HCN retaining…

Yes. Thank you, George. Execution on the Sunrise acquisition is exceeding our expectations. In September, we signed an agreement to sell the management company to a partnership led by KKR and Beecken Petty for $130 million, which is at the high end of our underwriting with HCN retaining a 20% ownership interest. As part of the agreement, we restructured the management agreements on the existing and future wholly-owned communities in a way that creates significant value for HCN shareholders and aligns the interest of HCN in the Sunrise management company. Shortly thereafter, we pre-funded the acquisition by issuing $1.7 billion of equity, in a price that locks in a positive return on investment. When we announced the acquisition of Sunrise in August, the portfolio included 20 wholly-owned communities and a minority interest in 105 communities. At that time, we described our intention and desire to buy out as many of the joint venture partners as possible so that we could control the assets, including decisions regarding CapEx, leverage and management fees. As of the closing date, which we will -- which we expect will occur in early 2013, we will own a 100% interest in at least 58 of the communities and a minority interest in the remainder of the 125 communities. And by July 2013, we expect to wholly own 115 of the 125 communities. At that point, our investment in this best-in-class portfolio will be $4.3 billion. The joint venture buyouts, combined with the new management agreements, will improve our cap rate to approximately 6.5% which is roughly 6.1% yield after CapEx. We believe such a return is extremely attractive on a risk adjusted basis and compares favorably to other large senior housing transactions. This is particularly true, given the growth prospects of this portfolio driven by the…

Thanks, Scott. Good morning, everyone. As George and Scott discussed, we're very excited about our platform, our relationship and growth prospects heading into 2013. The third quarter was another very active one for our team here at Health Care REIT and we completed another $1 billion of growth investments. We announced our Sunrise Senior Living transaction and then accelerated the anticipated pace of JV buyouts, including announcing the planned sale of the management company. We've raised capital through 2 successful equity offerings to preemptively fund our recent investments, lowering leverage by nearly 7 full percentage points during the quarter. We completed $133 million of dispositions of nonstrategic assets. And during this remarkable period, we have continued to move expeditiously to strengthen and diversify our portfolio, to reduce our exposure to government reimbursement and to position ourselves to benefit from an increasing percentage of future investment opportunities from existing relationship partners. Turning first to our investments. We maintained a very solid investment pace during the third quarter, completing growth investments of nearly $1 billion in the quarter and $2.9 billion year-to-date. As George discussed, our relationship investment program is driving consistent portfolio growth, enabling us to purchase high-quality assets at attractive returns for our shareholders. In terms of our third quarter investments, we completed $880 million of acquisitions at a blended initial yield that averaged 7.1%. Our major highlights included, first, 2 triple net seniors housing portfolios consisting of 19 facilities for $459 million operated by Senior Lifestyle, one of the largest private operators in the country, which makes them the 6th largest operator in our portfolio. Second, we acquired the first 5 Sunrise Senior Living operating properties located in the United Kingdom for $244 million. And Third, we completed $56 million of medical office building investments. In terms of third…

[Operator Instructions] Your first question comes from James Milam Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P., Research Division: I'm sorry. Can you just go over the dispositions for me one more time? You guys expect about $440 million this year and that brings you up to 700 -- or I'm sorry, this -- before year-end, then that brings you up to $700 million for the year. And then just as you go through that, can you just let us know if there's any debt associated with those? And then, if there's anything market-related that had you accelerate the dispositions, or if it's just that you guys feel like you're in a position where you can accelerate the portfolio repositioning on your own timing, regardless of what's going on externally?

Sure James, this is Scott. The first part of your question, the answer is there have been about $250 million of dispositions year-to-date. And $450 million implied pending in the fourth quarter, about $500 million in aggregate of the $700 million total this year are skilled nursing facilities. And of the remaining $450 million, there is about $80 million in debt on those properties. The bottom line is, it's actually a great time for us to evaluate the portfolio. It's a good environment for us to sell. We're finding that operators are looking at buying back properties and it's really a pretty reasonably attractive financing market. They can take it to HUD, bridge to HUD at rates in the 3% to 3.5% range right now. So that's helping our decision to accelerate some of our portfolio repositioning efforts. James Milam - Sandler O'Neill + Partners, L.P., Research Division: And is that impacting pricing a little bit as well? So are -- yields that you're selling now coming down a little bit?

Pricing has been pretty reasonable. I don't think it's really changed too much. Usually, yields on sales, we're often fortunate enough in those with to book a gain. If you look at the cash we received, we're probably in the, I guess you can say, low to mid-9s. I think inclusive of gains. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay. Perfect. And then my second question is you guys look out at the markets year end I know you've selected markets that you believe have high barriers to entry and it's harder for new construction. I'm just curious if you guys are seeing anybody looking to build or any competition for builders? Just if you could give us color on the construction environment, that will be great.

Sure. This is Chuck Herman. We are seeing some additional construction discussions out there. I wouldn't say the activity has noticeably picked up. But there definitely are some folks out there discussing it. Good news is that we have some pretty high barrier to entry markets that we're located in. So oftentimes, we're adding units to existing properties and really improving the quality of the assets along the way as well. So we feel we're in a pretty strong position. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Anybody doing -- the add-on seem to be picking up pace. Anybody doing any conversions from an IL to an AL or adding services or things like that, that you see that -- is that picking up pace at all?

It's pretty consistent within the marketplace. We haven't seen as many true conversions from one asset type to another. We hear some discussion about it, but generally, I can't point to a lot of examples at this point.

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

You may have mentioned it, what's the current Genesis coverage as of now?

Current Genesis for fixed charge coverage is about 1.3x.

Okay, 1.3. And that's decreasing to what after the next quarter, when the last round of Medicare cuts go through?

It's actually been stable. So it's still around 1.3x. I don't think we're forecasting too much of a change in that number.

So they've been able to adjust their business such that another quarter of cuts doesn't really affect it. Is that what you're saying?

Essentially yes. It's been right around 1.3x. And longer term, I think as they look to move and close to the Sun merger, hopefully, within the next month or 2, that there's really a nice opportunity for some synergies, as well as an opportunity longer term to improve their skilled mix, which is currently about 23%. And I think that each 1% that they're able to improve can add about $12 million to operating cash flow, if they're able to do that.

Got that. And so that's the reason that, that cover -- you expect that coverage to kind of eke up a little bit to between 1.3 and 1.4, right?

That's correct.

Yes. And then do you know what kind of returns they get on the CapEx that they spent, the revenue-generating CapEx?

I mean, they're standards for investments of that type, Jeff. We're in the mid-teens, at a minimum.

Okay. And then lastly, on your disposition program within the skilled nursing portfolio. How are you selecting the properties that you're interested in disposing off? Is it by certain operators, or is it more exposure to certain states that have Medicaid issues? I mean, what's your kind of criteria as you go through that pile of properties?

I think we evaluate all of those factors. Sometimes, it's states and sometimes it's particular operators. So it really depends on the situation. In the upcoming dispositions, they are largely portfolios that we're disposing of.

Are there certain states that you really want to stay away from?

Not as much state specific as it is really to history of the operator. And they're generally smaller investments that are not really strategic longer term, and they have the willingness and appetite to take -- to pay us off, and we're willing to do that. It's very much in line with our strategic initiatives.

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

So I think you've said in the past that you think senior housing RIDEA, that type of investments, they're deserving of a cap rate and similar to multifamily cap rates. And I'm wondering why you think that, considering -- I know we've talked about this before. But operating margins for senior housing are about 30%, 35%, and operating margins multifamily are more like 65%, 70%. So why do you come to that conclusion that you think you should be getting a multifamily multiple on senior housing?

Well, I think you pick the one -- the factor that probably is a negative to that argument. But in most cases, if you look at the demographics and you look at the relative stability of cash flows, which are being borne out, at least, in our portfolio and, hopefully, will be supported at some point with good academic research, our experience has been that they're amazingly resilient and much more stable than a multifamily. And so that's the essence of our argument, Rich.

A couple of years ago, maybe several years ago, you walked away from a Sunrise deal from a $700 million, $800 million. I can't remember what the exact number was. But what is -- why, draw the line between then and now? What has changed and -- from a pricing standpoint or what have you?

Well, frankly, I think we have to give a lot of credit to Mark Ordan and his team in terms of stabilizing the company, taking care of problems and, largely, eliminating market risk or company risk, which was -- had become quite a large factor beyond the portfolio we were looking at it at that point. So I think it was more of a relative stability of maybe the sector, but particularly of how good a job Mark and the team has done to make the company strong.

The other thing to think about that, when we walked away from that transaction was it was right in the middle of the capital market implosion. So we had raised capital, and we were then really well positioned going forward, so.

Yes, fair enough. So the storyline for HCN in the past years have been combination facilities and kind of age-in-place type of stuff. And you're moving now -- you'd say 85% private pay, 67% of your portfolio senior housing. You're kind of losing the diversification. Is it fair to say that the story is changing? I mean -- and if that's an obvious statement, why now are you doing that?

I don't think the story's changed at all. We think that any number of the continuums are really appropriate and allow folks to age in place, and generally, they have done better. So almost everything we've done in the large markets have been some combinations of IL/AL dementia or some subset of that. So I still think they're terrific investments.

I mean, I guess going away from the nursing home element is what I'm talking about I mean.

We have no problem with small SNF units as part of a continuum. We -- actually one of our investments in the skilled nursing side is Trilogy, which has a combination approach of Medicare and private pay-oriented SNFs with AL and dementia. We just think it's the appropriateness of the SNF setting in the right model that really makes a lot of sense. But to diminish our percentage of Medicaid-oriented skilled nursing, especially in certain states, made a lot of sense to us.

Okay. Last question for somebody. The 1.15 triple net senior housing coverage and the 1.2-plus percent SNF coverage after you do all the sales, what is the coverage after CapEx in those? Are you covering rent still?

Yes, above that level, yes. And just to be clear, skilled nursing coverage, when we talked about 1.2, that was just the low point of the dispersion. Everyone's above 1.2. So again, our overall coverage is currently 1.4.

But when you add the CapEx -- because you did have a kind of lengthy discussion about CapEx, you're still above one in that math?

Yes.

Your next question comes from Jorel Guilloty with Morgan Stanley.

RIDEA is tracking well above your guidance at about 7% in 3Q '12 and you'd said previously it's about -- you'd expect 5% to 6% growth rate for the year. I was just wondering, what is driving the strong performance relative to what you had budgeted at the beginning of the year? And do you expect this to persist, or do you expect some moderation in 4Q?

Jorel, it's Scott Estes. You're breaking up a little bit. I'm pretty sure the gist of your question was how is the RIDEA portfolio doing, expectations and what's kind of the factors behind the growth and how we're thinking about it next year?

Well, basically, I just want to see what is driving the performance relative to what you budgeted early in this year?

We've had some good fill up of some of our assets. The rents that people are commanding are doing very well also. So there's been a combination of factors that have led to the improvement.

Okay. And then following the dispositions acceleration that you just announced, how much more of your portfolio do you think you can potentially dispose of going forward?

This is Scott Estes. My view is we will have largely completed our major portfolio repositioning efforts through this acceleration. That being said, you should expect us probably to still look at potentially a couple hundred million of dispositions in 2013. Really, the opportunity we saw, in particular, was on the skilled nursing side that we've, I think, been talking to most everyone about, and it's just worked out pretty well that we think we can get a lot of those transactions done in short order. So we've decided to do it.

And then my last question is -- so after this year, you have approximately $250 million in development conversions remaining. Do you expect the development pipeline to increase in the near term? And if so, in what asset classes?

I think it will. Some perspective on our development pipeline, I would say probably 3 -- 2/3 to 3/4 of the opportunities would be in medical facilities area, I think, from the transactions that we generally look at. It's been a pretty low number. It's a nice opportunity we get some nice returns on those, I would guess, in the range of anywhere from, what should I [ph] say, $200 million to $400 million of potential starts per year is probably a reasonable estimate.

As much as $500 million, depending upon a -- the amount of activity in the senior space. You have to remember, we've added so many strong key portfolio operators in the last couple of years. And as they expect to grow their portfolios and whatnot, we would expect them to grow in the amount of construction they may do.

Our next question comes from Nick Yulico with Macquarie.

I think you said in the same-store senior housing operating, the occupancy was up 200 basis points year-over-year. Could you just give the actual occupancy number?

Yes. It's been -- it's right around 90% currently.

Okay. And then when I'm looking at that same-store pool, I mean, you have basically 116 assets there today versus the 99 you actually owned a year ago. So some of those, I guess, the assets sales [ph] then were Belmont, Merrill Gardens. Were some of those unstable assets and -- that are actually in the pool today, if we think about that from a year-over-year standpoint?

I think, Nick, the best perspective is we do have a little bit of a benefit. But obviously, it also went into our initial expectations when we talked about the initial cap rates we went in at. Exclusive of a good stat, I think it's exclusive of the benefit of anything and fill up our stable, call it, same-store portfolio. It was up over 5%. So you're getting 5.2% an area. So you're still -- you're getting a slight benefit from some of the assets and fill up but still the core portfolio is generating over 5% growth year-over-year.

Okay, that's helpful. And then on Sunrise, I think you said -- Scott, I think you said you're expecting a 6.1% yield after CapEx next year. Is that a number that is sort of an end-of-year figure for the return? Or is that supposed to be sort of an average for the year? I'm just wondering how -- what type of growth in NOI that might assume for the portfolio next year.

Yes. It's probably best to think about the 6.5% as sort of forward-looking yield as of July of 2013. That's the date where we expect to own basically 115 of the 125 properties on a 100% basis. At that point, we're able to reset the management fees. There is some NOI growth built into that number from the historical period, as you would expect. But to date, Sunrise has been right on top of our expectations, if not better.

Okay. So you said -- sorry, the 6.5% would be sort of a forward-looking return, forward 12 months as of next July 2013?

Yes. So if you looked at, say, a quarter of NOI in early 2013, it would probably be a little bit lower than 6.5%. But by the end of the year, you're going to be right around that number.

Okay, great. And then just one last question on Sunrise. I mean, based on -- it looks like the way you guys have done some of your same-store pool historically, really relates to how long the assets have been open rather than necessarily you guys owning them in the year-over-year period. So I mean, if that's sort of true, does that mean that the Sunrise assets could be going in your same-store operating metrics as early as maybe first or second quarter next year?

I think we'll evaluate that. I think the general discussions and feedback we've received from folks it'd be more of the traditional view, to wait until the full 15 months and start to report once we've had the transition in place. And that's basically the way we've started to do it now. So I think it's more standard. We can continue to discuss it, but that would be my expectation at this point.

Your next question comes from Philip Martin with Morningstar.

A question on your medical office building portfolio. Given that MOBs are increasingly becoming more of the focal point of healthcare delivery, what sort of value add and/or repositioning opportunities do you see within your MOB portfolio as they kind of move toward a greater use or a more comprehensive use?

I think that most of the new ones we've done through development are very well thought through with the right types of complementary services. I think that some of the old ones -- older ones may need some repositioning as we look at how all of the different physician, practices and services fit together. So I think our ability to analyze the clinical integration and to make suggestions to our hospital or physician or clinic partners will put us in a position to really add that value.

Is that part of the longer-term discussion you're having with some of your relationships? I mean, certainly, you have the location, but you may have a facility or a building that might be a bit obsolete. And again are your relationships sinking that far ahead?

I think that in most cases where we have the larger buildings, they are relatively new. I mean, the average age of our MOBs is, what, Scott, about 8 years, I believe now. So some of those are in very good...

12.

Twelve. So in -- with respect to the new ones, it's just a continuous discussion to see how our leasing is going, how the teams are fitting together, what doctor groups either don't need the same amount of space or need more and then trying to just continuously communicate. Some of the -- any of the older ones that we would take over, I -- the health systems or the clinics are very interested in our input to see exactly what we should do to reposition it, what we should do to renovate and refurbish, add on or whatever. So I think that's -- that really is in our sweet spot, being as immersed in healthcare and where it's going as we are. So we have those and we're in distinct conversations. And we're looking to build a new building or, say, to acquire a building that are somewhat older.

And based on your experience, I mean, would you expect -- and what you see and all the discussions you're having with all kinds of relationships out there, would you expect the tenant mix in some of your older MOBs to shift considerably or change considerably over the next 5 years?

I think it'll change. I don't know if considerably is appropriate. I think we're just going to be looking at the particular doctor groups, what the health system is doing perhaps in the area, what specialties they might have in a particular location around the MOB, what they're trying to do to rebrand out there. So there's just a whole very, very general discussion. So it's hard to universalize on an answer like that. But it's the kind of the discussions we have.

Okay. And then with your skilled nursing portfolio. The portion of your skilled nursing portfolio that you would consider core, that you want to maintain in the portfolio, where do you see margins going today to 5 years from now?

I think it depends largely on the ability to continue to add the enhanced services that Genesis has been adding over the last several years. So as they do their transactions and as they grow their company, there should be some additional synergies that you would expect from an operation's perspective, and then there should be some enhanced services that should add as well.

[indiscernible] the facilities, Philip, we've talked to the guys, they're going to take a more sophisticated operator, I think, with larger scale, the ability to lower cost, more efficient outcomes and quality of care will become increasingly important. They start to think about we're really focused on who really has the long-term platforms to improve on those metrics over the longer term.

Could you see margins go up 20%?

I think you're more likely to see a differential between the high-quality providers and the low-quality providers. I think the high quality -- people like Genesis are going to do better certainly relative to the rest. So their margins, I think, would stay roughly the same, but they're going to outperform the types of buildings that we're selling. That's our thesis.

And in the end, it's all about NOI for us. It's about NOI per unit, what they can generate there. So margins may go down, but if their generating more NOI per unit, you have more valuable assets.

And again, to the extent of the repositioning of the skilled nursing assets, are you seeing a better opportunity with -- or is it about the same as what you thought with this core SNF portfolio in terms of CapEx and value-add opportunities from HCN standpoint to fund some of those value-add CapEx initiatives?

We're looking at the portfolio as just that, as a core portfolio. So we're adding services where needed, adding new buildings as appropriate as well, where there's ability to enhance the relationship with some of the core health systems out there. So we're seeing opportunities throughout the entire portfolio.

The next question comes from Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: A few questions here. First, Scott, I'm sure you're working on a budget for next year. But can you give us some rough numbers for where you think, say, G&A and overall CapEx pencils out after you layer in the full Sunrise portfolio?

I'd really would just be guessing at this point, Mike. I think we'll clearly do that in February when we give the guidance. I would say that we're getting some relative savings as you think of our scalable platform as you add the Sunrise investment into our G&A. As I mentioned, our run rate in the fourth quarter, in terms of G&A, is looking like about $24 million. The aggregate CapEx for this year, what is it, Steve, about $54 million.

Right.

For the full year 2012. So I think I would take those kind of run rate and grow them at some point. At this point, we'll give you more specifics as soon as we can. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. And then Genesis, I may have missed this. I think you mentioned the CapEx being about $1,200 a bed, and then you said something about strategic CapEx of $800. What's the difference between the 2? And how do you see that extra $800 of CapEx continuing over the next few years, or is it more of a 2012 phenomenon?

I'll let Chuck Herman comment on -- help me answer your question. But the short answer is the routine CapEx is about $1,200 and the additional $800 is more strategic. And that would be things that are, in essence, more significant. That would be value adding. So if they're doing rooms or hallways or building out a rehab gym, those are things that essentially get into more of the strategic perspective. It's probably around in that area, I would think, going forward. Don't you think, Chuck?

Yes, I think so. Michael W. Mueller - JP Morgan Chase & Co, Research Division: So all-in about 2,000?

Yes.

Yes. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. And then last question. For the balance of the asset sales that you're expecting this year, what's ballpark cap rate?

10%.

Your next question comes from Tom Truxillo with Bank of America.

I kind of have 2, one for George and probably one for Scott, both have to do with 2 increased exposures from the Sunrise acquisitions. Just looking for a bit of color on each. The first is being the senior housing operating assets, and I do appreciate all the commentary on the call so far on it. But having said that, do you have any new commentary in kind of the strategic goal for how much of your portfolio could end up in senior housing operating? And have you discussed that with the agencies?

Well, Scott can comment on the ongoing discussions with the agencies, but I think I'd like to go back to the general point we made, both Scott Brinker and I made earlier, and that is that the most important variable in terms of doing an investment relates more to the quality of the operator, its assets and the markets where they're located. And we've been a little surprised at the quality of assets that really wanted to align interest and do a RIDEA deal. And it was, and in our judgment, compelling, even though it has increased the RIDEA components so that it'll probably be in excess of 30% at some point. We just think that much of the discussion has been somewhat misplaced, with all due respect, because it's focusing on more on the structure than the quality of the investment themselves. So we would like to keep some balance between triple net and RIDEA, but the -- and the bottom line is if we continue to have opportunities in the RIDEA area with outsized growth with the best operators, markets and facilities, we're going to continue to do that.

Sure. And I understand your point on it, and I tend to share that point. My question is more of how do you balance the way you view it versus what is obviously a negative view from the agencies on growing that exposure? And how do you balance it, too?

Well, I think part of it is to continue to communicate. It is also our ability to communicate the quality of the investment, whether it be on a RIDEA structure or triple net. And in triple nets, as Scott Brinker made clear, is no panacea. Simply because people are supposed to pay you, it doesn't mean -- and to make their own capital -- CapEx investments, it doesn't mean that they're going to be capable of it. They're in the wrong markets with the wrong assets and if the operator isn't that capable. But, Scott, just -- want to comment a little bit about the discussions with the agencies?

Sure. I think the answer really, George, is that you're getting at the crux of it. The perception of volatility and risk in RIDEA versus triple net is almost a misguided discussion. Again, when we're looking at the operators, the quality of the assets, clearly, in the best markets with the best operators is a part of our decision-making process. I think one important point is we would acknowledge, obviously, the pace of acquisitions has been significant. We do believe that an increasing percentage of our future investments will come from our existing relationships. So when we've had the discussions, I think, boy, the quality of our portfolio, lesser government reimbursement, greater diversity, larger assets are all things that should be favorable on the rating agencies sides. We've had our discussions with them, again, about the integration. And if anything, I think once we again show that we can successfully integrate these assets like we've done with our other portfolios, and I think we have a good shot at making, hopefully, some good headway there because the portfolio has really improved a lot.

I think even to the extent that people perceive the matter a little differently than we do, if you look at the outsized returns we make from a RIDEA investment, we think it's more than worthwhile in terms of this somewhat larger perceived risk. And I think, Scott Brinker, you have some numbers on what would happen if we had done Sunrise on a triple-net basis, right, and on a RIDEA basis? You might remind him of those numbers generally.

Yes. I mean, one thing that is important to think about when deciding whether to use a RIDEA or triple-net lease structure is that a triple-net lease requires you to share the cash flows. We're not familiar with too many operators that won't be willing to sign up to guarantee the rent, unless they're highly likely to make a large profit after CapEx. So on Sunrise, in particular, we at least thought about a triple-net lease and quickly came to the conclusion that we'd be giving up way too much of the cash flow over time and, therefore, quickly decided that RIDEA for this type of a portfolio, given it's growth prospects, was a lot more appropriate.

Great. And the second one is more of a balanced exposure. You guys are assuming a lot of secured debt with the acquisition, and I have your secured debt-to-assets ratio shaking out kind of in the high teens. Can you talk a little bit about your comfort level there? And if you're not comfortable there, how do you get that ratio down a bit?

That is correct. It's probably about the area that we -- we'd shake out if you just take within our earnings release today. We're comfortable with that level that's at the higher end of where we would probably like to see it, and I think we'll look at opportunities right off the bat. There's some -- clearly some of that debt that makes sense to pay off if we're able to do that. So we'd probably hope to keep it somewhat lower than that and we're -- when we're looking at that right now.

Your next question comes from Greg Laetsch [ph] with BMT.

Yes. I had a question about the Sunrise deal. HSR was supposed to expire on October 26. Can you guys give us a status on that? Did it expire? Did you do a pull and refile? Or did you get a second request?

This is Jeff Miller. We exited 2 separate ones, one for the Sunrise acquisition and one for the main co. FTC and DOJ let the waiting periods expire. So we're free to proceed with the closing.

Your next question comes from Rob Mains with Stifel, Nicolaus. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple of odds and ends here. Scott, with the sales that you're contemplating, I believe -- did I catch you right, that those are mostly to operators? I'm curious who's buying these.

Yes, that's correct, Rob, operators, yes. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: And the MOBs, you've had some pretty nice momentum with occupancy. The NOI growth really hasn't kind of gone along with that. Is that because of -- well, I'm not going to guess. Why is NOI growth been 1.5%?

The team has really done great -- I think a great job getting as much of the value added to portfolios as we've been able to do. We have about 70% of the increases in our medical office portfolio are fixed and they range probably in the 1.5% to 2% range. So you generally expect, I would say, probably 2%, maybe a little bit better growth, and there has just been some effect of leasing spreads that our rollover has been very small. So the kind of the number we've seen has been in the 1% to 2% range of late. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: And obviously, you've laid out some a number of transactions over this quarter and the next one that's kind of are already on the board. Should we infer from that, that some of the other deals that, obviously, you're not talking about, on -- that, that activity might abate a little bit? Or would that be a misread?

We're seeing transaction activity -- we're still seeing a lot of transaction activity. Really, it's a question of whether or not they're of the quality that we want to pursue or not. We do see a lot of SNF opportunities, I would say, more so than the private pay senior housing opportunities currently, although there's still some larger deals out there that we know are being reviewed.

you're probably talking about the market, generally. I think what we would do -- is yes, Rob, we very excited about the portfolio that we got. And if we think about what we may do, it's probably 2/3 weighted towards seniors' housing opportunities, 1/3 weighted towards medical office buildings. But yes, I think over the next 6 to 12 months you would see -- expect to see the pace in, at least, for us, about a 2 -- 1 to 2 years ago, we were getting 40% -- 30%, 40% of our quarterly investments from repeat business. Now it's up to about 60%, 65%. So I think that's going to an increasing part as we've added good partners just to grow with them.

I think if we go back to the thesis, Rob, and that is to -- we wanted to have the highest quality portfolio with the best operators, best markets in the country and with a lot of emphasis on the senior housing, high-end senior housing and MOBs. And we've largely accomplished that, and we're not going to dilute that through lesser types of investments. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Right. I was thinking also, though, in terms of the relationship investing. Just kind of like, is the total dollar amount in excess of what's in the press release today? Is that likely to come down a little bit for a while as you digest the latest spade of acquisitions? Or would you expect the relationship investing to still provide kind of a steady drumbeat of new investments?

We think that there probably are some relatively smaller investments out there that we could capture, perhaps apart from the relationships. But as we indicated, 64% of the last 12 months, rolling 12 months, would came from relationships. I, frankly, expect that number to increase after we capture the remaining Sunrise and some other independent investments. And I indicated in my remarks that I think -- if we ever get to that place called normalcy, which we keep looking for, then I think we're going to be more at the steady state $1.5 billion to $2 billion, and we'll be able to drive substantial growth in our FFO through our -- an excellent portfolio. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Then last question. This almost a footnote in terms of size. The entry fee business, occupancy up again this quarter. Could you remind us where you stand in terms of the deferred rent and the ability to capture some of that?

Yes. Our entrance fee facility is currently 13 facilities. It's only about 4% of the portfolio, and we continue to earn about 6.5% overall. It does continue to fill generally, albeit is somewhat slowly, probably a rate of 2% to 3% per quarter. We have some facilities that are doing well. You have a few that are probably struggling a little bit more, I think some more of the resort-like communities in the southeast that has a little bit slower fill-up times. So I think as always, we have a right to capture any of the upside, and I think that just allows us to continue to evaluate all of those buildings, as well as thinking about, if ever, repositioning as a rental model maybe makes sense or selling them ever makes sense.

Your next question comes from Alex Fridlyand with BNPP.

Just was wondering if you could remind everybody what the additional compensation in the SRZ acquisition is if the deal does not close by 21st of February, and just if you can say anything in terms of how you're thinking about that deadline.

Yes. The extension fee is down on a per diem basis. It's roughly $550,000 a day, and that starts in late February. But at this point, our expectation is to close in early 2013.

Your next question comes from Todd Stender with Wells Fargo.

Just a few more skilled nursing questions. What's the SNF portfolio going to look like after the $700 million are sold, I guess, if you look at it from a coverage standpoint, average age, state exposure? Any details you can share about that?

I think the best way, Todd, to think about it is we do have some Sun assets that we talked about. So you'd probably combine the Sun and Genesis portfolios. If we have $3.5 billion today, selling another $400 million to $500 million very short term gets us to about $3 billion portfolio. So genesis will basically be about $2.5 billion to $2.6 billion of the $3 billion total, and then we have a handful of others, as George mentioned, such as Trilogy, that have been -- we've got good relationships with longer term. So that really would make most of the focus in our portfolio will be the Genesis portfolio.

Okay. And just to clarify, I think you gave a few numbers about the portfolio. What's the in-place yield that the facilities you're selling are generating right now? And what's the pricing that you expect?

I guess I didn't average them all. I would think, generally, the in-place yield is usually in the 10% -- they've been in our portfolio for awhile 10.5% to 11%, but we often get a price above our book basis. So with those gains, it's usually a yield on a sales price, more like the 9% to 9.5% range that I mentioned before.

And what do you expect to put that back to work at? What type of reinvestment yield are you budgeting?

I think if you'd look at investments that we've looked at the last 3 to 6 months, probably you assume a 6% to 7% area, depends what the asset types ultimately are. But again, we're looking at high-quality seniors' housing assets and medical office buildings primarily.

And just finally, if the current tenants appear to be the most likely buyers of these assets and HUD financing usually takes quite a bit of time, how much of the $700 million of sales do you think you'll provide seller financing for, just to bridge financing?

Basically, none from our perspective. A lot of these have been in the works for a while. But again, to the operators, we, again, are comfortable with that being a realistic. It's all looking pretty good for fourth quarter closings at this point.

[Operator Instructions] Your next question comes from Tayo Okusanya from Jefferies.

Just a couple of follow-up questions. On the senior housing operating portfolio, the 7% same-store NOI growth, that's trending better than you guys were expecting. Just curious if you're seeing that across all your different operating partners or if there are particular partners that are really driving that number and everybody else is kind of in line versus the expectations?

It definitely depends on the operator, but generally, most are performing very, very well. So that's the beauty of having a portfolio of multiple operators doing RIDEA and the fact that it's diversified.

We saw nice rent -- rental growth, too. I mean, as I mentioned in the prepared remarks, revenue per occupied unit growth of about 3.5% this quarter.

Got it, okay. And then -- so for anyone that's really outperforming, apart from just the rental drive, is there anyone out there where occupancy gains are really doing much better than you expected, even despite the strong rent growth -- the strong rental rate growth?

We just had some fantastic operators that are doing well hitting on all cylinders. So some are performing a little better than others, but I would say, we're very pleased with the portfolio.

And my view would be about 1/2 were pretty much right in line with budget and about 1/2 are doing significantly above budget, I would say, this year.

Okay, that's helpful. And then the dispositions, the additional $450 million, any sense of pricing at this point or what the bogey is?

Same number, Tayo, as we've been mentioning. It'd be about a 9% to 9.5%, I think, yield on sale when you include the gain.

That's helpful. And then last quick question. When I take a look at all your same-store stats for the quarter, up 3.6% for the entire portfolio. Medical office buildings at 1.5%. I'm just kind curious, on the MOB side, where you potentially see that going to kind of given where current occupancies are? Do you still see there's upside in regards to same-store NOI? Or is that kind of a fair run rate-type number to be using going forward?

Yes. I think the short answer is it's probably a fair run rate going forward. We did a little bit of occupancy improvement -- but again, the guys are doing a great job. The 94 occupancy is getting close to about as good as I think you can get. But I think that's a fair 1.5% to 2% would be a rough expectation for MOB same-store growth.

Can you talk a little bit what kind of mark-to-market you're actually seeing on the MOB portfolio when leases expire?

We haven't given too much detail. And again, Tayo, if you look, we have very little expirations at only about 5% to 6% per year through 2016. The 24% in aggregate is pretty low. The spread is really tightened up. It's probably, what would you say, Jay, around 5% area. It's pretty...

Yes, it's 5.5%, mainly 5%. We're looking at above negotiating replacement tenants, maybe a little bit below that. It's driven somewhat by TI allowances but pretty flat from a leasing spread standpoint.

Yes. It's probably too [ph] conservative.

Your next question comes from Michael Carroll with RBC Capital Markets.

Can you guys give us some color on your ownership position in the management business? What's the yield on that investment? And is that a long-term hold?

This is Scott. We're going to own a 20% interest in the management company. The purchase price was in the neighborhood of 6x multiple on EBITDA. So that gives you a sense for the return on investment. And yes, our expectation is that we're going to be a long-term owner. We like the alignment of interests and think that the platform has substantial value going forward, particularly when we think about it overlaid with our current portfolio.

I think there are 2 reasons why we wanted to be there. One was for alignment. Two, we think we're going to do quite well, either long term or by taking the company public in 4 or 5 years. So we're very pleased with the investment.

Okay. And then can you describe the management fee related to the Sunrise portfolio? Are those similar fees to the rest of your RIDEA investments?

They are similar in that we think it's important to have an alignment of interest. So in virtually everyone of our arrangements, the manager participates in any excess NOI above a certain threshold, and they also participate in any shortfall against a certain threshold. And the Sunrise contracts will be set up in a similar manner.

Okay, great. And then I may have heard this incorrectly. But, Scott, I believe in your comments, you said there were situations where a tenant wouldn't want to lease a property under the triple-net structure. And in those situations, HCN might be willing to make a RIDEA investment. Did I hear that correctly? And could you expand the comment if I did?

Yes. The comment was that there are certain operators that do not want to do a triple-net lease. They like the alignment of incentives that a RIDEA partnership provides, and they have plenty of capital alternatives. And that is their preference. And for the right portfolios and operating partners, we're happy to use that structure.

I could give you some color on that for a moment. When we first met Merrill Gardens years ago, probably about 20 years ago now, the first thing that Merrill Gardens wanted to do in forming a new relationship was doing it as a joint venture, and we were not able to do that. As a relationship grew, and then we were able to do RIDEA. It was a natural for Bill Pettit and I to want do it that way, and he really believes in aligning interests. And I can tell you, too, that at least one other of the companies in our RIDEA platform has only done joint ventures, again, for the alignment. I think there's some real strength in it that maybe is somewhat overlooked in some of these debates.

At this time, there are no further questions. This concludes today's Third Quarter 2012 Health Care REIT Earnings Conference Call. Thank you. You may now disconnect.