Welltower Inc. (WELL) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Fourth 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 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 Fourth 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 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 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, for his opening remarks. George?

Thanks very much, Jeff. During my more than 2 decades of involvement in the senior housing and health care industry, I cannot recall a time with greater dynamism or opportunities. In 2012, Health Care REIT was both a beneficiary and driver of these dynamic markets. And Scott Brinker and Scott Estes will provide you with a quantitative and qualitative summary of our quarterly and annual investments and performance, but I want to set the stage by touching on some of the most important themes. First, our strategic plan has focused on maximizing total shareholder return by building a portfolio of high-quality communities and facilities in the strongest markets, operated by the most capable operators and health systems, all as demonstrated by their clinical and operating results. Our recently completed Sunrise acquisition was a milestone in the execution of this strategy, but there are numerous other relationships, developments and acquisitions that also advanced and solidified this strategy. Among the noteworthy investments during the fourth quarter were a major addition of $530 million to our Belmont relationship and the $240 million expansion of our relationship with Brookdale, both through RIDEA investments. Underpinning this strategic effort is our belief that this portfolio and network of relationships will deliver consistent and resilient returns over the long term. Of the $4.9 billion of investments in 2012, $3.7 billion of them came from existing relationships. And of the $2 billion of fourth quarter investments, 94% came from our relationships. So we really believe in these relationships. I think the real estate is terrific and that our risk-adjusted return profile is very, very strong. As Scott -- and Scott will cover it in more detail, we think our investment thesis has been borne out during the last several years. Second, the execution of our strategic plan has involved a thoughtful repositioning of assets. We have purposely invested in high-quality facilities and stronger operators with less exposure to government reimbursement. We are particularly focused on private pay senior housing assets that have proven their resiliency in tough economic times. The measure of each new investment for us is whether it will achieve solid, growing yields and steady appreciation over our long investment horizon. We have purposely disposed of assets that did not meet these criteria, including some relatively high-yielding but riskier assets. And as all real estate investors know, there are always a number of assets that do not perform as well as expected, and we are quite aggressive in managing these non-core assets, producing large net gains while driving more internal FFO growth and maximizing long-term value. Third, we have successfully managed the integration of our operating platform. Practically speaking, integration means engaging in a robust budgeting process with our operators; monitoring and evaluating operations against that budget, and for that matter, industry benchmarks; capitalizing on development and acquisition opportunities with these operators; maximizing operational efficiencies and putting in place a requisite people systems and processes. Before we ventured into the operating space, we believe we have the industry's most experienced and talented people and the industry's best systems. Those were dramatically strengthened during 2011 and 2012, and the operational results attest to the success of that integration. Our RIDEA platform portfolio has exceeded underwritten expectations in every quarter since our first investment in 2010. And there are also a number of qualitative measures that underscore this success. For example, on various occasions, I have spoken about our facilitation of best practices and group purchasing by some of our RIDEA and triple-net operators while at the same time being mindful of the necessity of competitive independence. Fourth, our medical office building portfolio had a strikingly successful year by any measure. Our acquisition pipeline continues to be strong as we closed $900 million of investments in 2012. Our development starts and conversions hit the targets that we've set, and our property management group once again demonstrated its depth and savvy by delivering industry-leading occupancy of 94.4%, maximizing revenue and carefully managing expense growth. Finally, we do not intend to rest on our laurels. The overall market dynamics, coupled with the implementation of the Patient Protection and Affordable Care Act, have created unique opportunities and risks. Within that opportunity and risk set, we intend to chart a technical course based on our strategic plan. This means that we will continue to aggressively look at opportunities both in the senior housing and health care sectors, continue to comprehensively evaluate domestic and international opportunities and derive resilient internal and external growth, both by increasing NOI in our existing buildings and working with our network of relationships to acquire and develop new facilities. Once again, we will be both a beneficiary and the driver of markets in 2013. And with that, I will now turn the microphone over to Scott Brinker, who will give you some perspective on our investments since we last reported to you, and then in turn to Scott Estes, who will give you a more detailed summary of our financial performance and 2013 outlook. Scott?

Yes. Thank you, George, and good morning, everyone. We have seen strong demand across the core portfolio. Same-store NOI continues to grow at a rate that far exceeds inflation, including 4% growth in 2012, which follows 4% growth in 2011 and 3.9% growth in 2012. Superior growth and low volatility is exactly the combination we built our portfolio to achieve. Nearly 80% of our NOI in 2013 is expected to be from private pay sources. Meanwhile, our government reimbursement portfolio is comprised of triple-net master leases, with strong payment coverage and corporate guarantees, which results in reliable income to HCN through all reimbursement cycles. We are now the largest owner of private pay senior housing communities in the world, and fundamental factors of supply and demand are favorable. Delivery of new supply tier is just 2% of existing inventory, which is less than the growth in demand. Modest improvement in the housing market provides further support for the operating environment. The supply-demand fundamentals in the U.K. and Canada are equally attractive. With that background, I'll turn to fourth quarter performance in our RIDEA portfolio. Same-store NOI increased nearly 9% from 1 year ago, driven by a 3.2% increase in rental rates and a 280-basis-point increase in occupancy. We benefit from owning Class A buildings in wealthy markets. The median housing value surrounding our communities is nearly 70% above the national median. As a result, our rental rates and the annual growth in rental rates far exceed industry benchmarks. Equally important, the NOI from our RIDEA portfolio was consistent and resilient due to the diversification of more than 30,000 residents paying rent each month. Same-store NOI growth has equaled or exceeded 7% in every quarter since our first RIDEA investment 2.5 years ago. Though we don't expect this incredible rate of growth to continue indefinitely, we do expect the portfolio to consistently outperform the industry in both NOI growth and asset value appreciation. Turning to our triple-net senior housing portfolio. Same-store NOI grew 3% in the fourth quarter from 1 year ago. We benefit from contractual rent escalators, strong payment coverage, bundled master leases with corporate guarantees and an average remaining lease term of more than 12 years. Our largest tenants include Brookdale, Brandywine, Capital Senior Living, Ameritas and Senior Lifestyles, who are among the biggest and best operators in the sector. Payment coverage is stable at 1.16x after management fees. With respect to skilled nursing, same-store NOI grew 3.3% in the fourth quarter from 1 year ago, and we expect reliable growth going forward due to contractual escalators, master leases with corporate guarantees and strong payment coverage. Genesis now accounts for 80% of our skilled nursing portfolio. Their fixed charge coverage is approximately 1.3x, and we expect it to improve over time as the company capitalizes on its ancillary services platform and its increased scale from the recent acquisition of Sun Health. Genesis is well positioned as an efficient, low-cost provider with critical mass and geographic concentration. They are already partnering with managed care providers to reduce rehospitalizations, and they are receiving incentive payments for their success. Turning to our medical office portfolio. Our rental rates and occupancy exceed industry averages and our peer group, highlighting the quality and desirability of our large outpatient centers that are affiliated with lean health systems. These buildings are well positioned in the evolving health care landscape that rewards health system sponsorships, efficiency and convenience. Same-store NOI in our medical office portfolio grew just under 2% in the fourth quarter from 1 year ago. Our hospital and life science portfolios continue to produce strong and consistent results. Same-store NOI grew 2.5% and 4.8%, respectively, in the fourth quarter versus 1 year ago, in line with historical results. With respect to investment activity, we invested nearly $5 billion last year, with private pay senior housing and medical office comprising virtually all of the activity. The highlights include the initiation of relationships with Sunrise, the premier brand in the industry; Chartwell, the largest provider in Canada; and Senior Lifestyle, one of the 10 largest providers in the U.S. We also expanded our existing relationships with Brookdale, the largest provider in the U.S.; and with Belmont Village, an operator of 5-star senior housing communities in major metro markets. These investments are immediately accretive and should produce resilient and outsized growth in NOI and asset value. We've already completed an additional $2.5 billion of acquisitions in 2013, thanks to closing the Sunrise transaction ahead of expectations and buying out several joint venture partners at favorable prices. To date, we've acquired $3.5 billion of Sunrise real estate, and we negotiated favorable fixed-price options on additional Sunrise real estate that we expect to acquire by mid-2013, at which point our investment in Sunrise will be $4.3 billion, with an initial yield of 6.5%. The return is particularly attractive given the quality and growth prospects of the portfolio and is the result of sophisticated structuring around the management fees and joint venture buyouts. We also acquired a 20% interest in the Sunrise management company, which had proved strategic as the sector evolves. We spent much in the past few months with our partners at Sunrise, and integration is on track. We've integrated 6 RIDEA partnerships to date. Outperformance relative to budget, coupled with follow-on investments with our partners, is evidence that integration is an area of expertise for HCN. As to external growth, we are well positioned to our strong -- due to our strong balance sheet and most importantly, our relationship investment platform, which now spans the U.S., Canada and the U.K. Our relationships throughout the industry are unmatched and represent a competitive advantage for external growth. Finally, turning to dispositions. We sold more than $500 million of non-core assets last year, generating gains on sale of $100 million and unlevered IRRs averaging nearly 11%. The dispositions were primarily skilled nursing facilities and LTACs, and we reinvested the proceeds into core assets that match our strategy of owning a portfolio that combines superior growth with low volatility. Our CFO, Scott Estes, will now discuss our financial results and 2013 guidance.

Thanks, Scott. Good morning, everybody. During 2012, we generated an 18% total return for our shareholders, and as George and Scott discussed, we're excited about our platform, our relationships and growth prospects heading into 2013. From a financial perspective, during the latter half of 2012, we raised capital through 2 successful equity offerings and a large unsecured note offering to preemptively fund our recent investments. During the fourth quarter, we also generated over $330 million from dispositions of nonstrategic assets. Thus far in 2013, we've increased both size of our line of credit through a new $2.25 billion revolver at a lower cost, funded a $500 million term loan and completed an additional $2.5 billion of Sunrise-related investments. Finally, our balance sheet remains strong, and we have ample liquidity, with $1.8 billion of line capacity, pro forma for the Sunrise transactions that have closed 2013 to date. Turning now to financial results of the quarter. We reported normalized fourth quarter FFO per share of $0.85 and normalized FAD per share of $0.74. Year-over-year growth was impacted by our decision to preemptively raise a significant amount of equity and debt capital during the third and fourth quarter, used primarily to fund the Sunrise transactions in early 2013. We recently paid the 167th consecutive quarterly cash dividend for the quarter ended December 31 of $0.765 per share or $3.06 annually, representing a 3.4% increase over the dividends paid in 2012. Next, I'd like to take a minute to explain several of the extraordinary items on the income statement, which are primarily related to our recent acquisition and disposition activities. First, we incurred $19 million of transaction costs associated with our significant level of acquisitions in the fourth quarter. We generated $54.5 million in gains on property sales in the quarter, beyond the $277 million book value of assets sold. Finally, we took $22 million of impairments associated with assets held for sale at year-end, which included several non-core nursing homes, a hospital and medical office building expected to be filled during 2013. In terms of fourth quarter capital activity, we successfully raised $1.2 billion of senior notes through a multi-tranche offering of 5-year, 10-year and 30-year notes, which had a blended maturity in excess of 12 years and average interest rate of 3.5%. As a result, our current blended debt maturity of 9 years is well matched with our average lease maturity of 11 years. We also issued 651,000 shares under our dividend reinvestment program, generating $38 million in proceeds. As a result, we ended 2012 with full availability on our line of credit and had over $1 billion of cash and cash equivalents. Subsequent to quarter end, we put in place a new $2.25 billion line of credit and a fully funded $500 million term loan. After closing our new line and funding the term loan, we completed Sunrise transactions of approximately $2.5 billion, which included the assumption of about $445 million of debt after payoffs. As a result, pro forma for the approximate $2 billion in cash required to fund this early first quarter '13 Sunrise transactions, we had about $500 million borrowed on our new line of credit, leaving ample liquidity with approximately $1.8 billion of available credit and $500 million of projected disposition proceeds in 2013. The significant capital raised towards the end of 2012 allowed us to prefund our early 2013 Sunrise-related closings while maintaining solid credit metrics. At the end of December, our debt to undepreciated book capitalization stood at 41.4%, while debt to adjusted EBITDA was 6.1x, both of which exclude any benefit of the $1 billion in cash on the balance sheet at that time. Our trailing 12-month interest and fixed-charge coverage at year-end remains solid at 3.3x and 2.6x, respectively. After completion of the early 2013 Sunrise transactions, debt to undepreciated book cap and debt to adjusted EBITDA increased only slightly from year-end levels, while our longer-term target of 40% debt to undepreciated book cap and net debt to EBITDA of 6x or below remain unchanged. Finally, I'll review our 2013 guidance and assumptions. We expect to report 2013 FFO in the range of $3.70 to $3.80 per diluted share, representing 5% to 8% growth. Our 2013 FAD expectation is a range of $3.25 to $3.35 per diluted share, which also represent a 5% to 8% over normalized 2012 results. As George and Scott mentioned, our core portfolio and largest operators are performing very well and are achieving attractive internal growth. We're again forecasting 3% same-store cash NOI growth in 2013, which is headlined by 5% growth in our senior housing operating portfolio, which we hope to prove conservative, given the favorable current outlook for the senior housing sector. Although we don't include an assumption for additional investments beyond those already announced, you should expect us to continue to invest with our relationship partners and look to capitalize on attractive investment opportunities. We will develop selectively to further enhance the quality of our portfolio and believe we will complete the majority of nonstrategic asset sales by the end of 2013. I'd like to spend a minute now comparing our initial 2013 earnings guidance to the current 2013 consensus forecast. I believe the difference between our initial guidance and the current consensus forecast boils down to 3 main factors: first, consistent with past practice, we did not include any additional acquisitions in our guidance; second, our guidance does include the disposition of $500 million of largely nonstrategic assets this year; and third, our guidance reflects the $0.07 to $0.08 impact from our decision to aggressively reposition our remaining entrance fee portfolio at the end of last year. To translate the impact of that $0.07 to $0.08 into economic terms, the 14 original entrance fee properties, which have a book value of approximately $760 million, generated a blended yield slightly over 6% in 2012 and are now projected to generate a blended yield of approximately 3.5% in 2013. I would like to provide some more specific color regarding the repositioning of our entrance fee portfolio. I think, consistent with our past comments, occupancy in the entrance fee portfolio has gradually continued to improve through mid-February to the current 76% level. Despite the steady progress, entrance fee investments remain non-core to our investment strategy. For that reason, during the fourth quarter, we capitalized on an opportunity to convert 3 entrance fee communities to a rental structure by moving the lease to another operator in our portfolio who has a proven track record with rental fee TRCs. This effectively eliminated 25% of the company's entrance fee risk while providing for significant potential lease increases in subsequent years as the properties fill. Further, we converted an existing rental CCRC to our RIDEA structure, which will allow us to directly participate in all of the upside of this specific property. And finally, these moves served as the catalyst to reevaluate and lower rents that aided the remaining lower entrance fee communities remaining in our portfolio to provide some near-term liquidity and operational flexibility to the current operator. We believe these recent moves put us in best position to maximize value of these non-core assets, which now represent less than 1% of the total properties in our portfolio. And finally, regarding the timing of our repositioning efforts, we very likely could have kicked the proverbial can down the road under the existing structure for several years. Instead, we made the decision to move to a better structure now, one that minimizes our entrance fee exposure with lower risk and has potential for more meaningful upside over the next few years, given the favorable current outlook for the seniors housing sector. Moving now to our 2013 investment forecast. Our acquisition guidance only includes the $2.5 billion of Sunrise-related closings, which have occurred to date, plus the additional $745 million of Sunrise-related closings anticipated in July. We expect approximately $500 million of dispositions at a book yield of 10%, but forecast the yield on total sales proceeds closer to 9%. These projected dispositions consist primarily of a combination of non-core skilled nursing and MOB assets, which will allow us to drive our private pay percentage towards the 85% range toward the end of this year. Finally, we're projecting development conversions for projects currently under construction of approximately $249 million this year, at an average initial yield of 8.3%. Regarding our 2013 same-store cash NOI forecast, we believe that our current portfolio mix is an excellent balance of higher growth opportunities and stable long-term investments. More specifically, we anticipate blended 5% growth out of our operating and life science portfolios that, as I previously mentioned, hope to prove to be conservative, supported by a 2% to 3% blended rent increase out of our triple-net lease portfolio in medical office buildings. Taken together, we believe our portfolio will generate same-store cash NOI growth of approximately 3% in 2013. Our capital expenditures forecast of $73 million for 2013 is comprised of approximately $54 million associated with the seniors housing operating portfolio for an average approximately $1,700 per unit, with the remaining $19 million from our medical office building portfolio, representing approximately $1.50 per square foot. Our G&A forecast is approximately $115 million for 2013, which includes approximately $8.5 million of accelerated expensing of stock-based comp, which will be recorded during the first quarter. As a result, we anticipate first quarter G&A of approximately $31 million. And finally, as I mentioned previously, we'll continue to manage the balance sheet to a debt-to-undepreciated-book-capitalization target of approximately 40% over the long term. However, we don't have any specific plans to raise equity in the immediate term to meet this objective, given our significant current liquidity position. With that, my prepared remarks are completed, and I'll turn it back to you, George, for some closing comments.

Thanks very much, Scott. During the past several years, we have built a world-class organization and portfolio designed to deliver strong earnings growth and long-term value to our shareholders. It's clear that health care delivery will continue its rapid pace of change, and we believe that Health Care REIT is best positioned to capture the many opportunities presented by that change, and we look forward to continuing success and delivering substantial value to our shareholders. And with that, operator, we're -- we'll open for questions.

[Operator Instructions] Your first question comes from James Milam with Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Scott, thank you for all of the color on the balance sheet. I guess, would you mind giving us some metrics as you look out over the year? And obviously, you said, and I agree, you have a good liquidity position now, but over the course of the year, and assuming that there are some partners who wants some -- that you do acquisitions with, how are you going to -- how would you like us to think about your funding, whether it's the line of credit, an unsecured offering or potential equity offering over the course of the year?

James, I think there would be no veering from our traditional strategy, which would be to use the line of credit. To some extent, part of the reason to have a larger line in place is to have a little bit higher utilization and also, provide us some additional flexibility. So I feel good about that, combined with the level of dispositions this year also being a potential source of capital for us. But again, I would presume that, as you do your model, once you got up to $1 billion level or so, you could put permanent capital in place, and it's up to you to -- how you want to model getting to 40%. That's undepreciated book over time, but debt and equity will be on the table. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay. Then, George, maybe for you, but -- obviously, a very successful partnership with Belmont Village so far. I guess I'm curious, as these operators expand rapidly with you guys, how -- what is their ability to successfully scale their operating platform to take on all these additional assets that they're now managing.

Well, in the case of Belmont, they were already managing -- operating those facilities, and we're doing very, very well with them. But James, I think you're asking a very good question. One of the things that I want to do and all of our team wants to do in the next 2 or 3 years is to help put the right people, systems in place for all of these operators so that they -- so that, in fact, they have a scalable infrastructure, and all of them are working very hard with us to do that. And one of the real points of emphasis in our best practices sessions, which are held 3x a year, is to talk about what we all need to do to make senior housing even stronger in the next 2 or 3 years, take it from really good to great, because it's already being acknowledged as a critical part of the property sector. So I think that Patricia and her team are just doing a great job out there. But again, we want to have a major influence on all of our operators in trying to help them be even better. But lots of progress is being made.

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

So just quickly on the CapEx number that you mentioned, if it's -- is it 11 -- about 11,000 units Sunrise that you're adding, is that right?

That's about right.

Okay. So if you have 25,000 in -- as of the fourth quarter and you add another 11,000, I don't see how you get to $54 million at a $1,700 per unit run rate for average for the portfolio. Can you just reconcile that for me? $1,700 times 36 is a bigger number.

Maybe we'll follow up with you after this call, but there may be a timing issue as well and not all of the Sunrise assets are being acquired as of January 1.

We've also articulated the Sunrise assets that we're actually spending probably, closer to what, Scott? $2,000 per unit on -- we've talked about that, so we can work on the math.

That would make it even more of a disconnect. And then, when I think about RIDEA and the risks associated with RIDEA, you guys continued down that path. But what are the other risk besides the just volatility in earnings, which I can acknowledge that over the long term you're going to do better RIDEA than you might do in triple-net. But what about litigation issues, state regulatory environment, those types of things? How do you balance those types of risks when you consider what you're getting into with taking on such a large RIDEA exposure at this point?

We don't think that there are significant additional litigation risks at all. The person -- or the company that is actually operating the facility is the manager, and we are just given an opportunity to benefit from some of the operating results through a taxable REIT subsidiary. I don't know, Scott Brinker, if you want to comment on that further, but we don't see -- we think the returns more than outweigh any minimal additional risk, Rich.

Somebody didn't like how they're treated, they're going to sue everyone, it doesn't matter if that makes sense or not, you have to protect yourself. I guess, that's the way I would think about it. But anyway, we can move on. And my last...

Rich, let me just comment on that. Because every now and then, all of us in the health care REIT sector get sued if something happens to a resident and usually we spend a month or 2 or maybe as long as a year just getting dismissed from the case. So I wouldn't unduly focus on that.

Okay. Fair enough. And then last question for me is when I was looking back at your 2012 guidance a year ago, it was $3.68 to $3.78 and you reported $3.52. Your new guidance is $3.70 to $3.80. I know you have that entrance fee issue. So at a minimum, you reported a number much below what your guidance was and I understand, George, to your point, that you have a long-term focus. But I guess, when will the long term be now? I mean, how long do we have to wait for these enormous investments and associated capital raising activities to actually grow earnings?

Well, Rich, we have grown earnings. We haven't grown earnings as much as we would have if we wouldn't have had to fund absolutely terrific investments. I think we've been trying to lead you to the point where gradually we're going to be at a steady-state where we'll do $2 billion a year from our existing operators, and therefore, the capital raising will have less impact on the movement up of our earnings, okay? But we have been very surprised and very appreciative, by the way, of the opportunity to take some of the best portfolios in senior housing off the table and put them into our camp, when it was quite a competition for Sunrise. And we've done well there. We'll continue to do well there. But it's pretty clear to us that we are moving in the direction of a more steady-state of investing, but as long as great opportunities come up and we can really create value for our shareholders, we'll probably take advantage of it. I mean, there are just many fewer, Rich.

Is it -- $3.70, $3.80 issued guidance, would you expect that to go up with investments or go down in 2013?

I would think as we would have the opportunity to add investments, we would hope that they would be accretive, although usually, if you model financing and relatively similar timing, it's marginally accretive to that level. But I would hope they would be accretive. Sure.

Your next question comes from Jorel Guilloty with Morgan Stanley.

You've stated that on any given year, you can potentially acquire $1.5 billion to $2 billion in assets from existing relationships. However, given your company's current size and geographic scope, you still -- that target still stands?

You're breaking up a little bit. George, he was asking is the $1.5 billion, $2 billion investment is changing given our larger size now as we think about investment opportunities.

Well, I think that the fact that we have added other operators like Belmont and Sunrise and others over the last 2 to 3 years, there's a chance that, in certain years, we might get more opportunities on the $1.5 billion to $2 billion. We have done a lot of thinking about it, but I still think that I'd keep it in that range for now.

And if we were to think where are in the cycle right now, would you say that perhaps that number is a bit low? I mean, if you look at what you've done in the last 2 years, it's definitely north of that.

There's a chance it's low, but actually, these have -- we talked about $1.5 billion to $2 billion of investments on a steady-state more from an ongoing stream of opportunities from existing operators. So we did 94% of our investments in the fourth quarter with our existing operators. So that's how -- what we think of as our strength. Now whether in the next 2 or 3 years, when we've seen folks essentially take advantage of a liquidity event, whether or not that drives a higher level of growth during the next couple, 3 years, I think that's a possibility.

Got it. And then following the $500 million in asset dispositions you have targeted for 2013, do you think you're largely done disposing of noncore assets?

We have certainly made a lot of progress in doing that and we've been focusing in on smaller medical office buildings as we've talked about the need to have larger MOBs that are really medical facilities themselves with the outpatient surgery centers and a really good complementary mix of doctors and we've made a lot of progress there, not a whole lot more to do. And then if you look at SNF, already, Genesis is at 80% of our SNF portfolio. So we're actually getting our portfolio in most of these disposition categories to where we want it. But we've been averaging, what, Scott, about $200 million a year or?

Yes, I told them the last year, obviously, over $500 million.

$500 million. So I think we'll always do some, just because we don't want to spend a lot of time and incur an opportunity cost for operators that aren't performing that well. But I think it's definitely starting to ebb a bit.

Yes. I think that's right. I would just add that we feel, as you said, George, very good about where the skilled nursing portfolio is. About half of the disposition is scheduled in 2013, our skilled nursing assets. So upon completion of that, we should really have only about a $3 billion portfolio that Genesis represents about $2.6 billion of it and another handful of 3 or 4 other operators, so really 4, 5 core operators, and I think we mentioned on a previous call that are all projected to cover rent in excess of 1.2x. And as you mentioned on the medical office building side, George, the portfolio is doing very well with aggregate occupancy at 94.4% and now 93% of the building is affiliated with health systems and average square footage increasing to over 60,000 square feet. So even some of the recent MOB's dispositions have actually been fairly high occupancy buildings, so they're much more strategic in nature. So I think we've done really well in that front too.

Just to add one other piece of the color, I guess, every now and then, especially on the reimbursement arena, for example in the SNF area, you'll find a state that gets really tough on reimbursement, so you can never tell when that might occur, and at that point, we probably allow one of our SNF operators to take some of its facilities to HUD or reduce the cost just to make it work better within our reimbursement system. So there are always those issues that all of our asset managers have to look at when they come back to management to make a recommendation for a disposition strategy in a particular year.

Your next question comes from Josh Raskin with Barclays.

Just first question on the RIDEA portfolio. The same store growth, I think, was 8.6%, obviously a strong number there. And I apologize if I missed it, but could you talk a little bit about the underlying occupancy and maybe rent increases that you're seeing in that portfolio, in that growth?

Sure. This is Scott Brinker. Last year, it was 3.2% growth in rate and 280 basis points increase in census. And for 2013, we're expecting closer to 2% to 3% increase in rate and about 2% increase in census.

Okay. And then I think you said 5% will be the total, so just looking at that, it just seems like there's a little bit of a wiggle room in there. Is it sort of fair to say that '13 is starting off a little more conservative?

We would hope to exceed the budget. Like I said in the prepared remarks, for 10 quarters now, performance within our RIDEA portfolio, our growth has been about 7% in every quarter. So hopefully 5% ends up being conservative.

Okay, got you. And then I know Jack had a question on the guidance.

So I guess, just playing off that. How much of a factor is the unstabilized portfolio for RIDEA?

Yes, it's not that big. This is Scott Brinker again. Our growth in the fourth quarter was just under 9% and the growth in this stabilized portfolio is just under 8%. So most of what you're seeing is still the stabilized portfolio.

Got you. And then as you look out over 2013, do you see any additional opportunities to convert senior housing triple net over to RIDEA?

No. We continue to think triple net is a great business. We've invested over $3 billion that way over the last 2 years, with yields over 7%. We've got some of the best operators in the country under our triple-net structure, and we'll continue to pursue investments that way as well.

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

Just quickly to follow-up on that last guidance. It seems like you're projecting a lower rate growth next year even as your occupancy continues to climb. I would think that as you get more stabilized occupancy, you can really push rate. Is there something different in that portfolio? Or are you -- are we reaching a rent ceiling or are you just being conservative?

Yes, Jeff, I don't think there's a ceiling. These markets, we increased rates at a level that was 50% above what the industry achieved. So we expect these communities to continue to outperform the sector. Hopefully, the guidance does end up being conservative but there's, of course, always a little uncertainty with the state of the economy. The good news is there's very little new supply in these markets and the housing market is at least starting to improve generally.

Okay. Going to your entrance fee portfolio that you repositioned. Talk a little bit about who the operator is that you transferred your assets to, why you elected to just do those 3 and I guess leave the other operator in place for the remaining. And what kind of lease structure did you implement that's going to allow you to capture upside as that -- as those transferred assets continued to lease up?

Do you want to cover the operator, and I'll cover the numbers part?

Yes, sure. Yes, the operator is a group called Covenant Care [ph] that we have an existing triple-net lease portfolio width of about 10 buildings. They've been in the business for several decades and has outperformed on rental CCRCs in our experience with them. In terms of the economics, because we're converting from an entry fee model to a rental model, you don't have to dig sort of first-generation entry fees coming in. You otherwise would have, which impacts their ability to pay rent in 2013. Over time, the NOI will be substantially higher than it would be in an entry fee model. So the NOI growth is in the neighborhood of 20% per year on average over 5 years.

I think you did mention too that you're going to reset -- we're going to reset rate after 3 years to look at the market with suitable coverages, too, so we see substantial upside here, Jeff.

Okay, so you have a rate reset built in after year 3. Okay, that makes sense. And then lastly, going forward, just how are you thinking about development? And in light of this restructuring, as you go forward, obviously, you're keeping it as a much smaller percentage of your overall portfolio and percentage of assets but what else are you thinking about in terms of how to keep from getting into this situation again?

You're saying how are we going to avoid having undue amounts of development, is that your question?

Yes, I guess, the question is how are you thinking about the relative risks of development going forward?

We always have thought that doing a certain amount of development, both in senior housing with the demographics becoming even more compelling makes a lot of sense for existing operators within the context of a master lease. And then two, for MOBs, given the relatively small size and the fact that many of the older MOBs do not have outpatient surgery centers, et cetera, and haven't really been as well positioned vis-à-vis complementary services from that, we think there's a very strong reason, rationale, for doing some development, but except for a period back when we were the leader in assisted living years ago. And then when the capital markets crashed, okay, and we have, if any, certain development, I think we've always been within a very reasonable range of development and we're not going to go above, what, 3% or 4% or so going forward, but there's sure a need for it, Jeff. So we're not concerned about it, especially when we're dealing with existing operators who are already covering very well within the master lease.

And I'll point out, Jeff, too, that our policy on not breaking ground under medical office building developments until we're at least 75% preleased, and note the ones we have under construction currently are 89% on average preleased, so it's clearly an appropriate risk-adjusted return. And I think we pretty consistently would say we get -- we get, say, 150 basis points higher returns on a relative development opportunity versus an acquisition.

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

With regards to your long-term leverage targets, how soon do you want to achieve that level? It appears the company has been running above this range for a little while now.

I'd say it's an intermediate term goal. I mean, Mike, we're always looking at the capital market opportunity and balancing that with our investment opportunities, and like I said, it's nice that we have, I think, all the tools in place, and fortunately, we've had access to the different components of the capital market, even including the drip in ACM option as well. So the honest answer is, I would say it's over a period of years, generally, but there's no immediate need. As long as we're within a relative range, we'll look to be opportunistic as we think about capital raises.

Then how many assets do you expect to sell a year? Is that $500 million in the guidance for 2013 a good annual run rate?

My guess to gut [ph] is that that's a little bit higher than normal. As a reminder for everyone's benefit, we were actually projecting about $700 million of dispositions last year and we ended up, I think, at $534 million, so actually, there is some, call it spillover effect, of a few of those dispositions are happening in 2013. So you're probably moving to, call it a more normalized rate. We'll always look at some level of access, but it should be lower other than, it's always the decision to look at anything opportunistically, but I would think lower than that as a general run rate.

Okay, and then last question for me is, with the repositioned entrance fee portfolio, why was one community put in the RIDEA structure and not leased like the other ones? Is there something different with that one community?

Yes, it's a separate portfolio, really. The 3 assets that were transitioned to rental were with 1 operating partner. This other building had been converted to rental before it opened 2 years ago and has been operated by a third-party operator since the date it opened. And we just made the decision that, given its current performance and future expectations, that the RIDEA structure was the right way to align incentives and capture the improvement in economics over time.

Yes, that building is actually just starting to gain some nice momentum. If you look at it, the assisted living Alzheimer's and skilled nursing components are all essentially 90-plus percent full, but they are a fairly small piece of the aggregate building. And then the independent living had been filling about 7 net units per month last year. So occupancy is actually on the cusp of adding some meaningful growth, we hope. They're about 40% full now. So making the transition, albeit painful, from just a short-term earnings guidance, we really do have some nice upside there that we should hopefully capture a lot of the 2013 earnings impact if that building fills over the next couple of years.

And I think, Scott, just to add a little color that being able to convert certain floors of that from IL to AL will give a more certainty to our fill up as well. So we're feeling pretty good about that.

Is that a new operator in that building too? Did you change the operator?

No, we did not.

Your next question comes from Nick Yulico with Macquarie.

Turning to the Brookdale investment in the quarter. Was that -- I mean, I'm assuming that was those -- the 11 assets were the ones that they had purchase options on, is that right?

No. They had done, this is Scott Brinker, joint ventures with various third-party private equity companies over the years and Brookdale already managed these properties and had a joint venture interest in them. And we essentially just replaced the private equity company, which is a model that we've used on a number of occasions in our portfolio.

Okay, got you. So -- and can you talk about what the cap rate was on that?

It's at 10%?

Yes. Our investments in the fourth quarter for the RIDEA portfolio were about 6.5% on average. The Brookdale portfolio was at the high end of that.

Okay. And that 6.5% that you give there, that's, if I remember, that's essentially pre-CapEx and looking like forward by year. Is that the right way to think of that?

That's right.

Okay. And then just turning to Genesis. Is -- did they -- I mean, you talked a little bit about the work that they've done with the managed care outfits, but did they not participate in the bundled care program that CMS is doing. It didn't look like they did. I was curious what you're hearing from them on that process and then also if you had any update on experience you're having on the managed care side?

Yes. They didn't participate in the initial sort of cash basis for bundled payments, but they're certainly well set up to participate once it becomes more formalized. It's still very early stages. What they are doing, though, is participating with various managed care plans where they have a geographic concentration with the goal of reducing rehospitalizations, which is really the key point in the bundled care, anyway. And they're already receiving economic benefits for reducing those rehospitalizations over time.

So I mean, is Genesis, is that -- is there an opportunity there to do more investments with them over the next year as they are trying to capture some more of that business?

We think there is an opportunity to do that and we think their model is very good. We're pleased to see Andy become the CEO and we think they're a great -- entity. We'd really welcomed the opportunity to do more business with them.

Okay. Sorry, were you referring to Brookdale there?

Genesis. What we're are doing with -- excuse me for 1 minute, the Genesis deal is a different story. What we like to do with George and Chuck and people who have been very active in that is that we are encouraging them to refinance some of their older Medicaid facilities and put our money into the new post-acute facilities connected with or close to some of the hospitals for more of the post-acute provision.

Your next question comes from Tayo Okusanya with Jefferies.

Just a couple of questions. The same-store NOI growth forecast, the new 3% number in 2013 versus 4% in 2012, is that entirely -- that decline, is that entirely being driven by the lower same-store assumptions for the senior housing operating portfolio? Or does some of the CCRC restructuring also factor in if that's part of the same-store pool?

Tayo, I think it's probably being driven by a conservative outlook. As a reminder for everybody, we came up with 3% guidance in 2012 as well. The general component's really, again, with the RIDEA. Again, we would hope to prove conservative that 5% as we've already discussed and the majority of the other triple net component blends, as usual, to somewhere between 2% and 3%. That's where we went out with the 3% overall guidance.

Okay. But the CCRC restructuring does not impact that number? Is that part of the same-store pool or not?

No, it's not. We're excluding the same-store pool because the restructurings are vastly different models and we provided more than adequate disclosure about the entrance fee community.

That's exactly what I needed. That's helpful. And that's just kind of focus Genesis and skilled nursing for a bit. Coverage ratios came down a bit again this quarter. We're probably going to end up having sequestration at the end of the week. We saw which part of the tax relief act additional impact to the world of therapy services. Just kind of curious what you're hearing from George at this point with regards to managing some of that continued pressure on reimbursement rate.

Yes, Tayo, this is Scott here. Fixed charge coverage remains at about 1.3 and we would expect to stabilize at that level. We're now at the full year of the new reimbursement system. We actually think that coverage will start to pick up over the next 1 to 2 years. The acquisition of Sun Health should be particularly helpful to payment coverage as they realize synergies. That's going very well to date, but again, we see that stabilizes 1.3 today and improving over time.

What if you end up with a combination of this cut of therapy services at the beginning of the year, sequestration cut March 1, and to where we don't get a market basket update this year, do you still think that coverage will go up?

Yes, the 1.3x assumes sort of all of these worst-case reimbursement scenarios, not that they do something on top of what they're talking about today, which we don't expect, but I guess it's possible then we'd have to revisit our expectations, but the 1.3 improving over time does assume that sequestration happens, and therapy reimbursement continues to be challenged.

Then just the last question for me. In regards to the acquisitions outlook, although nothing's built into your numbers, could you talk specifically about areas of strong interest where you'd like to build the portfolio and specifically any comments on increasing the size of the Life Science pool, just given how strong the Cambridge market is right now?

We've continued to look. We have not had much luck in finding other additional investments in Life Sciences that gives us the type of returns we think we need, but we're very, very pleased still with Cambridge.

Are there other property types that have a very strong interest in building a portfolio in?

We're mainly focused on modern, larger MOBs and if it's a development with at least 75%, 80% preleased with great systems and especially senior housing, both triple that and RIDEA with the best operators in the country in the best markets. That's our focus.

Your next question comes from Rob Mains with Stifel, Nicolaus. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: If I could follow-up on the Brookdale discussion, the 11 assets, those were joint ventures with private equity and you bought out the private equity partner. Is that how it works?

That's right, Rob. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: So Brookdale's role doesn't change. It's just to gear there that your the partner now?

That's right. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And the 5% guidance that you gave for RIDEA in Life Science, you discussed how that could be conservative. Triple net and medical office building, 2% to 3%, I know that's -- it's kind of just math to figure out what NOI growth again on triple net. Could the MOB -- could you describe ways that MOBs might be able to do better than that or do you think that's probably the range that they would be in?

Rob, this is Scott Estes. The MOB growth, it's probably actually a little bit below that average that we've traditionally gone into the last few years and next year is pretty similar, at kind of a 1% plus type range. So we'd hope to do a little bit better than that. It's better -- it's probably going to be a little bit less than the 2% or 3% average as you think about it.

Yes, Rob, this is Scott. One thing that makes it both challenging, but also in a good way, there's very little rollover in our MOB portfolio. It's only about 20% of our leases expiring over the next 4 to 5 years. So it's a highly stable source of income in our portfolio. It just doesn't produce extraordinary NOI growth.

Right. Yes, 94.4% occupancy. The team is about maximizing the occupancy there, so maybe unlike some others that have some assets that are underutilized, we're trying to get members successfully getting, I think, as much as we can out of that and its results in about 1% plus growth in the last couple of years. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Got it. When we look at the entry fee, assets are being repositioned. Scott, when you described the new leases that you said 20% NOI growth over 5 years, that's over the course of 5 years, that's not the CAGR, right?

No, that's on average, Rob. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And do we -- we spoke of those -- were those -- were you describing the 3 that were transitioned to a new operators at the 3 plus 8 that you're lowering the rent?

Yes, Rob, the NOI growth that I referenced is for the 3 properties that are transitioning to the rental model. There is NOI growth built into the entry fee assets as well, but it's certainly not 20% per year.

Yes, Rob, maybe I'll provide for you and everyone else just a little more color. If you look at that portfolio today, you can see in our supplements, there's about $480 million of entrance fee assets that are probably at about 5% -- 4.5% to 5% in 2013. The 3 assets that were moved to the rental model are probably in the $175 million range and the 1 RIDEA building is probably about $100 million facility. So the $175 million and the $100 million components, those 4 buildings under the new structure basically have breakeven to slight income currently. So again, I think it's taking a lot of the impact now with having very good upside with those buildings fill over the next 3 years. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then the remaining 8 that the rents are being lowered, are those the ones where you have sort of like found the patterns in the others, above average bumps at a lower rent?

It will depend on the fill progress from here, but yes, they would actually still have reasonably good increases to the extent the buildings fill. There, again, I think, they're probably on average about 75% occupied. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And with, since the rental [ph] -- so you say depends on fill process. Is there kind of a participation in the fill that determines the rent?

Just the ability to reset the rates, basically on the NOI.

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

Just a couple more quick questions. In the fourth quarter, Sunrise exercised the purchase option with NHI. How does that play a role? I mean, is there any more of that where they're a management entity or a lessee and they have purchase options? Is there any of that in the portfolio that's not a part of the bigger 125?

No, there aren't, Rich. We own 125 Sunrise communities. The Sunrise management company, of which we're a 20% owner, is a lessee of our portfolios, and they, of course, manage the 300 assets. I'm not aware of any third-party purchase options in that leased or managed portfolio.

Okay. So checked the transcript but in -- for NHI, they sold an asset for $23 million to Sunrise in the fourth quarter and they described them as their tenant. So I was just curious how that all worked into the broader scheme of things?

Yes, so Rich, just to make sure we're clear. We were certainly participating in that decision because we now own that asset. So there's nothing beyond that.

Okay, nothing beyond that, that's the point. And then George, if I can ask a kind of a conceptual question for you. There are 2 kind of camps as they think about RIDEA and the returns required to compensate for the risk. I'm curious if you have a thought -- if your thought process is where you think about it is a premium to a triple-net execution, or do you think about a return relative to a conventional multifamily transaction. I'm just wondering how you think about being compensated for risk and what mass is behind it for you.

Well, Rich, right now, we tend to think of it compared to a triple net in the senior housing area, and usually, we're talking 100 to 150 basis point increase and unlike some of my colleagues in the health care REIT field, all of us really look at the operator first and try to determine if we can do either a triple net or RIDEA structure with a great operator, and a great market and a very good facility. Ultimately, I suppose, as we begin to get some of the credit, vis-à-vis a better multiple compared to a multifamily, we'll get back and talk about it later.

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