Welltower Inc. (WELL) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2013 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 Zach Ottenstein, Director of Marketing and Communications. Please go ahead, sir.

Thank you, Brooke. Good morning, everyone, and thank you for joining us today for Health Care REIT's Second Quarter 2013 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. 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. George?

Thanks very much, Zach, and good morning, everyone. Thank you for joining us. During the last 5 years, we experienced a period of intense investment and capital activity. All of this activity has been purposeful and singularly focused on achieving our strategic objectives. Our goal has been to assemble a vast health care and senior housing real estate, managed by the best internal and external teams, so that our portfolio delivers the highest quality care and the strongest, most resilient growth in the sector. We believe that this ongoing performance can only be sustained by working together with our operators and partners to foster collaboration, best practices and enhanced communication and IT capabilities, so that we are prepared for the integrated health care delivery system. During the second quarter, this focused activity continued, as we announced an exciting partnership with Revera that solidifies our leading position in the vibrant Canadian market. Early in the third quarter, we closed on the balance of our important Sunrise investment and also completed a $213 million sale-leaseback transaction with Avery Healthcare in the U.K. In addition, we continue to enjoy impressive organic investment growth with our existing partners, including acquisitions and developments with Benchmark, Brandywine, Genesis, Silverado, Legend and Signature. Despite the ever-changing market situation, we believe there is a healthy opportunity to invest in significant portfolios that are consistent with and advance our strategic plans. Scott Brinker will walk through our investing activities in more detail momentarily. I've spoken on many occasions about the quality and passion of our partners and our team. A number of you had the opportunity to see that quality and passion first-hand at the Investor Day event we hosted in May. You were able to see the virtual ACO that we facilitated with our partners, Virtua Health Care, Genesis and Brandywine in Voorhees, New Jersey. But you have to go beyond that to understand our portfolio management success. Chuck Herman and our team, as well as our partners are fully immersed in the senior housing and health care sector. And what does this mean practically? One, we are change agents and industry insiders. We can shape and react positively to market and regulatory changes. We thoroughly understand market dynamics and we understand how outstanding care can be delivered in a cost-effective manner. Our long track record of success proves superior knowledge of and immersion in health care leads to superior results. I will continue to speak about our unparalleled immersion in health care and how it adds value to our partners and will continue to add value to our shareholders in the future. We emphasized real estate and management quality because it translates into high satisfaction among all stakeholders, residents, tenants and employees. Our operators and tenants shelter and care for tens of thousands of individuals each day in an environment that nurtures not only their physical but their social well-being. Our operators have a strong commitment to delivering the highest quality care and they continuously strive to deliver even better care over time. As Scott Estes will report to you shortly, our financial results bear out our investment thesis. During the downturn, our portfolio had the resiliency to provide stable growth. During the moderate upturn that has been ongoing for the past several quarters, our portfolio has grown robustly. As we enter what we believe will be a period of better economic growth, our portfolio is poised for even stronger performance. We have a well-planned mix of longer-term and shorter term leases in the form of triple-net leases and RIDEA arrangements that should allow us to capture upside as the economy picks up steam. In short, our strategic design works through all economic cycles. I will now turn the call over to Scott Brinker and Scott Estes, who will summarize our investment and financial performance. Scott Brinker?

Thanks, George. We delivered another quarter of internal and external growth. Same-store NOI increased 3.8% over the prior year. Our internal growth rate over the past 11 quarters has averaged 4%, more than double the rate of inflation. The internal growth rate has also been reliable with exceptionally low volatility, consistent, superior performance, the direct result of our strategy to own the highest-quality real estate with diversification by industry, operator, geography and lease maturity. Let's start the detailed review with our RIDEA portfolio. Same-store NOI increased 8.4% over the prior year, above budget due to rate growth. The portfolio is well diversified between assisted living, independent living and memory care. Operating results have been fantastic. In the aggregate, year 1 NOI has exceeded our underwriting by 4% and growth in NOI after year 1 has surpassed our budgets. Looking forward, the outlook is favorable. Expenses are under control, new supply is modest in our markets, the housing and employment markets are improving. Most important, the portfolio continues to benefit from demographics and need-based demand. Turning to our triple net senior housing portfolio, it continues to produce consistent, attractive growth. Same-store NOI grew 2.7% over the prior year. We expect to see similar growth in future years. Moving to our skilled, post-acute portfolio, same-store NOI increased 3% over the prior year. We expect consistent, 2.5% to 3% growth over the long term. Genesis accounts are 80% of the portfolio. Their scale, platform and superior management team make them a leader in the post-acute sector. All 176 of our Genesis properties are bundled into a single master lease. We expect 1.3x fixed charge coverage this year with improvement over time. A rental payment from Genesis is well-secured, and we're expanding the relationship to the construction of state-of-the-art, post-acute facilities. I'll wrap up the portfolio review with our outpatient, medical office portfolio. Same-store NOI grew 3% over the prior year, above our expectations due to strong leasing activity, our portfolio's industry-leading occupancy and rental rates. There are a few reasons for this. One, nearly all of our MOBs are affiliated with the health system. This provides a stable base and attracts other tenants. Two, we have the youngest, most modern portfolio in the sector. Three, we have a topnotch in-house property management team. Four, our buildings were designed to benefit from the relentless shift from inpatient to outpatient care. We're actively developing new outpatient medical office buildings with yields that exceed acquisition cap rates by more than 150 basis points. Currently, we have $137 million under development. All 8 projects are affiliated with health systems, and they're 85% pre-leased. Turning to investment activity, there are a lot of buyers in the market right now. Like us, they're attracted by resilient returns and strong fundamentals. In times like these, we turn to our vast network of relationships for proprietary deal flow. The headline last quarter was a $1.3 billion investment with Revera. It's another example of our ability to source off-market NAV accretive investments. The portfolio consists of high-quality independent living communities, concentrated in top 5 Canadian metros. Projecting an initial cash yield of 7% with strong NOI growth over time. The investment also highlights our focused approach to external growth. Several years ago, we evaluated multiple countries for international expansion. We identified Canada and the U.K. as by far the leading candidates. Fast forward to today, we're the second largest senior housing owner in Canada. We've also partnered with Canada's largest providers, Revera and Chartwell. We have rights to first opportunity to both, which lead to future accretive investments. In July, we expanded our sector leading presence in the U.K. to $213 million off-market sale-leaseback with Avery Healthcare, one of the premier operators in the U.K. These are 14 brand new buildings, the average age of just 2 years. The initial lease rate is 7% with 3% annual escalators. We also negotiated future rights that lead to off-market, accretive deal flow, including the take-out of Avery sizable development portfolio. The U.K. is at the beginning of a massive paradigm shift in moving seniors out of old, government-funded facilities into modern, private-pay facilities. The shift is demanded by both consumers and the government. We've now partnered with 3 operators with the forefront of this shift: Sunrise, Signature and Avery. Our platforms in Canada and the U.K. are unique within the sector. There are 2 differentiators in our ability to generate internal and external growth. Within the next 60 days, we expect to acquire Merrill Garden's minority interest in 38 senior housing communities for $173 million. Merrill recently chose to focus on development as opposed to managing stabilized assets. They approached us about acquiring their 20% JV interest. This is a high-quality, well-located portfolio. We received strong interest from our existing partners, some prefer the RIDEA structure, others prefer the triple net lease. Our decision to convert to a lease is not the beginning of a trend in our RIDEA portfolio. We chose Emeritus for 2 reasons: one, the location of these 38 assets is an excellent match with our existing footprint; two, their proposed lease terms were very appealing. We lock in attractive rent growth while retaining upside to participation in gross revenue from the facilities. In early July, we completed our Sunrise joint venture buyouts. These buyouts occurred in 15 separate transactions, all but 1 was privately negotiated outside of an auction process. Our investment in Sunrise real estate is now $4.3 billion, with a yield expected to exceed 6.5% in the second half of the year. The timing and economics of the buyouts far exceed their expectations. It created substantial shareholder value. As you can see, the new investments and portfolio management, continue to position the company to deliver consistent growth. Now I'll turn the call over to Scott Estes, who will discuss our financial results.

Thanks, Scott, and good morning, everyone. Scott just detailed how our investment and portfolio management strategies have generated consistent and resilient results. I'll now describe how our corporate finance efforts support the same strategic initiatives through our capital structure and financial results. In doing so, I'd like to leave you with 3 key thoughts: first, our balance sheet and liquidity are in great shape having completed our $1.7 billion equity offering in May; second, Health Care REIT's blended cost of capital remains near historic lows, allowing us to continue to source investments that are accretive to NAV; and finally, our recent internal and external growth significantly enhanced our visibility into earnings growth, not only in 2013 but 2014 as well. Let's begin today with our balance sheet and liquidity. As I noted, our balance sheet and liquidity are in excellent shape. At the end of June, our net debt to undepreciated book capitalizations stood at 39.3%. Our debt to adjusted EBITDA, interest coverage and fixed charge coverage are all in line with our strategic target levels on a pro forma basis. Adjusting for the incremental EBITDA from transactions, which have closed year-to-date, our current run rate debt to adjusted EBITDA level is right at the 6x level, while our interest and fixed charge coverage are 3.5x and 2.8x, respectively. We efficiently raise capital to fund all transactions that have been announced year-to-date. In early May, we completed the sale of 23 million shares of common equity at $73.50 per share, generating $1.7 billion in gross proceeds. We also issued 718,000 shares under our dividend reinvestment program during the second quarter, generating $51 million in proceeds. As of June 30, we had $512 million in cash and no borrowings on our credit lines. Subsequent to quarter end, we completed both the Sunrise and Avery Healthcare investments and had several other regular fundings occur. So as of today, we have a little less than $600 million in total borrowings on our credit lines. As such, we're in a strong liquidity position with nearly $1.7 billion of line availability having already funded $5 billion of investments this year. And now let's take a look at our evolving cost of capital. Although our incremental cost of capital has increased somewhat in light of recent moves in interest rates and stock prices, our blended cost of capital remains near historically low levels. Specifically, we estimate that our cost of issuing new 10-year debt is in the 4.3% range today, representing an increase of approximately 80 basis points from the unprecedented levels seen earlier this spring. Our equity has generally performed in line with the REIT sector in 2013, generating a positive total return of approximately 7% year-to-date. As a result, the increase in our cost of capital has driven us to adjust our pricing requirements to some extent, yet we remain confident in our ability to continue to source investments during the latter half of 2013. Finally, I'll conclude today with an update regarding our financial results and guidance. Again, the key takeaway here is that the investments we've already completed and financed year-to-date put us in position to generate strong earnings growth not only this year, but next year as well. And for the second quarter, normalized FFO and FAD increased 4% year-over-year to $0.93 and $0.82, respectively. Our results this quarter came in slightly better than our internal expectations. There were 3 primary drivers to our better-than-expected results. First, the strong 3.8% NOI growth from the existing portfolio. Second, our ability to close the Revera transaction in May, only 3 weeks following our successful capital raise. And third, slightly lower G&A and CapEx spending than anticipated. We recently announced our 169th consecutive quarterly cash dividend for the quarter ended June 30 of $0.765 per share or $3.06 annually, as this represents a 3.4% increase over the dividends paid in 2012 and a current dividend yield of 4.8%. Our 2013 FFO and FAD payout ratios are projected in the range of 81% to 83% and 91% to 94%, respectively. Before I provide an update regarding our guidance and projections through the remainder of the year, I'd like to point out several enhancements to the supplement this quarter. First, on Page 2, we added an adjustments column to the portfolio NOI table. This adjusts for the timing of acquisitions, dispositions and construction conversions, which occurred during the quarter, allowing you to more accurately calculate the quarterly NOI run rate for the most recent period. And next on Page 6, we created a page detailing the stratification of payment coverage across leases in our triple net portfolio. We're happy to provide this increased transparency, which provides detail, both before and after management fees as a percentage of NOI. The bottom table also provides additional detail on any mass release that covers less than 0.95x on an after-management fee basis, which importantly comprises only 1.6% of our total company NOI. Turning now to guidance. Our 2013 normalized FFO and FAD guidance remain unchanged at $3.70 to $3.80, and $3.25 to $3.35 per diluted share, respectively. These both represent solid 5% to 8% growth year-over-year. We now forecast approximately 3.5% blended same-store cash NOI growth for 2013 above our original forecast of 3%. This increase is attributable to strong first and second quarter results and the continued strength of our seniors housing operating portfolio, which is now projected to generate same-store NOI growth of approximately 6% for the year. As is typical for us, our guidance does not include an assumption for additional investments beyond those already announced. We do continue to expect approximately $500 million of dispositions for the year. Thus far, we have completed $314 million at a blended yield on sale of 7.3%, including net gains on sales. Our remaining dispositions this year consists primarily of a combination of noncore skilled nursing and medical facility assets. Finally, we project the total of $287 million of development conversions this year at an average initial yield of 8.5%. Our capital expenditure forecast is currently $67 million for the year, comprised of approximately $49 million associated with the seniors housing operating portfolio with the remaining $18 million coming from our medical facilities portfolio. And finally, our G&A forecast for 2013 has declined slightly to approximately $107 million for the full year from the previous expectation of $112 million. At this point, we anticipate approximately $27 million to $28 million of G&A per quarter during the remaining 2 quarters of 2013. That concludes my prepared remarks. But I would like to leave you with my view that we are in a very strong financial position entering the second half of the year as we continue to execute on our strategic plan. At this point, I will turn the call back to George for some brief closing comments.

Thanks very much, Scott. With our $5 billion of investments year-to-date, our total investments since the beginning of 2010, now total $19 billion. Moreover, as our relationships continue to deliver the preponderance of our investments, we will continue to deliver strong investment opportunities even after this period of unprecedented transactional volume is over. We believe that our results clearly demonstrate the success of our business model, as we have continued to add operators and systems as partners. And these new investments, together with our recurring investments created by our existing relationships, have driven consistent growth with asset quality that we believe is the best in our sector. The architecture of our portfolio with a mix of triple-net leases and RIDEA arrangements is positioned to deliver strong shareholder value through all economic cycles. Today, we believe our strong portfolio and sets of relationships in the United States, the U.K. and Canada position us very well for the future. And with that, operator, that concludes our remarks, and we're open for questions.

[Operator Instructions] Your first question comes from Michael Carroll with RBC Capital Markets.

Do you guys still expect to drive 5% same-store growth from the senior housing operating portfolio after delivering what, 5.6% in the first quarter and 8.4% in the second quarter?

Mike, it's Scott Estes. Yes, we do. The portfolio continues to do very well on the whole. And as I said, we're forecasting about 6% for the year and hopefully, we'll do a little bit better than that. But everything is going, going well with the RIDEA portfolio.

All right. What was the sequential same-store occupancy increase compared to last quarter?

In the RIDEA portfolio?

Yes, the same-store portfolio.

Yes, it was down a little bit, I think 30 basis points. But the NOI growth was high, it was in the neighborhood of 5% quarter-over-quarter. So good rate growth, very modest expense growth, more than offset a small decline in occupancy, which we've more than recaptured as of today.

Okay. Thanks for the disclosure on the tenant coverage ratios. At what level do you start being more concerned, is it that 0.95 level, because it does look like you have about 8% of your NOI still having a coverage ratio below 1.05.

No, it really depends on the portfolio. We try to produce a little bit of detail on each one. Is there a guarantee, is there a letter of credit, what's the term of the lease, what kind of assets are they? So it really varies. Some portfolios are still in the sort of turnaround phase and we're perfectly comfortable that they're eventually going to hit a 1x-plus payment coverage ratio. So it's hard to say. We prefer to have a [indiscernible] above 1.0 today, but on that list, there aren't too many that, I would say, we're concerned about, if any. And as you can see, all of them are current on their rent payment.

Is there any particular operator that's in that lower group?

No. Like I said, generally speaking, we're very comfortable with the triple net portfolio. We're happy to provide the additional transparency. We're confident it's going to produce consistent growth going forward and we're providing the transparency hoping that they're going to come to the same conclusion.

Okay. I would note, Mike, too, of that portfolio, it's only 1.6% of total NOI. Every single one of those lines that we have additional detail is just one facility except for one specific relationship. And that one specific relationship is actually likely to pay us off and remain current on rent throughout and it's projected sometime next year, I believe.

Okay. Then how do your current leverage metrics impact potential investment opportunities? I mean, it looks like in the third quarter, your leverage metrics will start creeping a lot higher than your targeted long-term leverage metrics just given the strong investment activity you completed recently.

I don't think there's any change. As a reminder to everybody, I think we saw a benefit in our overall cost of capital, given our recent upgrades to BBB flat from S&P. So we're now BBB flat across-the-board and I feel like our general target remains 40% debt to undepreciated book. And from time to time as we raise capital, it goes up or down around that number. But again, that's so we would remain committed to that target long term and I don't think we could've done more than raise $1.7 billion of equity this quarter. So I think we still feel comfortable with our target level.

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

I guess this one's for Scott Brinker. Is the same-store pool this quarter the same as the same-store pool last quarter, those same 118 assets or did it somehow shift?

Same pool, Jeff. Over the next year we'll start adding portfolios like Chartwell, Sunrise, Brookdale, Revera, Belmont Village. So it's -- the total RIDEA portfolio today is 357 assets and about a year from now, you'll have all of those in the same-store pool.

So looking at it sequentially, it looks like the revenues were relatively flat in that same-store pool, but the expenses dropped by 200 basis points or so. Can you kind of talk about what's driving that?

Jeff, let me look at the numbers. But in general, occupancy was down a little bit, but it was more than offset by strong rate growth, and then operating expenses increased only very slightly. So that quarter-over-quarter, if you're comparing 1Q to 2Q, the NOI growth was more than 5%.

Yes, I'll talk to you off-line. And then, how many of those assets in the same-store pool are lease-up assets?

There aren't many at this point. The growth for the whole same-store pool was 8.4% year-over-year, and only 4 of them are lease-up assets. So the 114 stabilized assets NOI year-over-year grew almost 8%.

And then, quickly, just shifting gears to investment activity. In terms of the U.K. and Canada, what kind of supply growth do you see in the senior housing market there? And how do you -- does that make you nervous at all or is it less in the U.S.? Where is it in relation to U.S.-based investment in senior housing?

It's modest in Canada, about 2% a year, which is less than the growth in the population. So, throughout the country, occupancy is up, rates are up about 3%, and our portfolios are up even higher. U.K., there isn't good construction in this construction stats, but what you have in the U.K. is really a need to replace the lion's share of the supply that exists. Their older, outmoded buildings, mostly government pay, and the assets that we own, 46 communities now, are modern, private pay assets. So I'm not sure what the stat is, but there needs to be more development, not less in the U.K.

Your next question comes from Tayo Okusanya with Jefferies.

So for the quarter, the guidance -- you guys talk about you're raising guidance on the same-store NOI for the senior housing portfolio, G&A is coming in a little bit lower. You're ahead of most of your expected trends. I'm just kind of curious why guidance was not raised.

The factor really -- the #1 factor really relates to the timing of our equity deal and then the incremental investments we've announced since providing our last guidance. So if you take all the parts, we raised $1.7 billion of equity in May, and then really announced only about $1.4 billion of incremental investments through, roughly, our $1 billion ownership of Revera, the Avery transaction as well as the Merrill Gardens and Emeritus transactions. So that $1.4 billion of incremental investments comes out later in the year. I think we're very happy to raise the capital efficiently and do it without any change in our guidance. So the G&A and the CapEx factors are relatively minor and when you put it all together, they're about roughly net neutral given all those parts and we have lower leverage as well, as a result.

And then Merrill Gardens, I understand this whole idea of them wanting to just focus purely on development. But 2 quick questions on that. One, do you have kind of a right of first refusal on their development pipeline? And then second of all, even with the switch over to the new operator, just kind of curious why you didn't use a RIDEA structure in that scenario.

Yes, we do have a right of first refusal on future development that -- from Merrill Gardens. Two, it was clearly a desire on management's part at Merrill Gardens to make their company somewhat more simple and to have a development and a fill up platform. Bill and I -- Bill Pettit and I talked about that at length before they came to that conclusion. Now, why we ended up with Emeritus and a sort of modified triple-net structure, is that we thought Emeritus was -- after looking at RIDEA structures, triple-net structures with different operators, we thought they were the best fit, in large part because the footprints are so similar between Emeritus and Merrill Gardens. But what we did, even though we moved to Emeritus' preferred triple-net structure, we added an IGR, incremental gross revenues kind of feature so that we could capture some of the upside. So we thought it was really a good result. Any other comments from...

No.

Okay, great. And then just last one for me. Just from a couple of quarters back, the entrance fee conversion, if you've got an update on that?

Yes, the portfolio is doing well, I had it budgeted, current on rent payments, and we're excited about what that portfolio is going to look like over the next few years.

Your next question comes from Juan Sanabria with Bank of America.

I was hoping you could discuss a little bit with regards to the Avery portfolio, what the occupancy is and coverage levels given their relatively new assets, it seems?

Yes, they are new. So several have been opened for less than 2 years and are still in the fill-up stage. So occupancy's in the low to mid-80s, certainly trending up. Payment coverage today is around 1.0, but it certainly it's going to escalate pretty substantially over the next 3 to 4 years as we bring in new facilities as well as seeing the existing assets stabilize. So around 1.0 today but I would expect a 1.2 plus within a few years.

Okay. And then, just on the supply picture here in the States, are there any markets you're sort of watching, that you're a little bit concerned about the pick up there? And are you able to disclose sort of your top 5 MSAs with regards to seniors housing exposure just so we can compare to the industry data?

Yes. I think we're going to actually start disclosing by MSA. We think it's going to show the diversity of our portfolio. We do track new construction pretty closely. We're really not concentrated in any of the markets where there's substantial new supply like Dallas, Denver, Houston. We just don't have much of a presence, particularly in RIDEA in those locations. So we follow it. But as of today, it's not something that we think is going to negatively impact the portfolio in any material way. And to your specific question, the top 5 markets are London, Toronto, New York, Boston, Los Angeles.

And just one other question. You kind of mentioned CapEx was a little bit below a normalized level. What should we expect on a normalized level going forward?

Yes, our previous forecast for the year 1 was $73 million. So it's only about $6 million lower at $67 million. So in our medical facilities portfolio, it's something like $5.5 million to $6 million per quarter, and the RIDEA portfolio something in the 13.5-ish million range per quarter.

One other comment on CapEx. I commented about our portfolio being the youngest and most modern in the sector. The MOBs in particular, that's also true in senior housing. And when you look at our CapEx relative to anyone else in the sector, it's remarkably low, which means we're generating really strong NOI growth without needing to put a lot of money into the assets. So I think it's important thing to keep in mind when you think about the quality of our real estate.

Your next question comes from Jack Meehan with Barclays.

Looking at the RIDEA portfolio, could you just talk about how occupancy track through the quarter? I know the average occupancy was down 30 bps. But what did the point-in-time occupancy look like?

Yes, on the same-store pool of 118 assets as of yesterday, it's flat versus the second quarter average. But if you look at the entire RIDEA portfolio of 357 assets, the occupancy as of yesterday's about 100 basis points above the average from the second quarter. So in the aggregate, we're definitely seeing a positive trend.

Okay. Are you surprised that the same-store number is flat in the second quarter, usually when you see a ramp, maybe after the holidays and after flu season?

Not necessarily. In the aggregate, the portfolio is trending in the right direction. So we try not to worry too much about month-to-month performance. It's a well-diversified portfolio by operator, by industry type, meaning independent versus assisted, geography. I mean, things are going to fluctuate a bit quarter-to-quarter but in the aggregate, the portfolio is producing superior and consistent results.

Okay. And then similarly, I thought that your new disclosures around EBITDAR coverage were great. Can you talk about the remediation plan for the senior housing properties that maybe fall under 1.05x? Is that something more occupancy-related or on the pricing side?

It's a mix. We did try to identify the 2 or 3 portfolios that we're in the process of selling. So there are a few that we'd like to exit from. The others, we're perfectly happy to own and think they're going to continue to trend in a positive direction.

Your next question comes from Nick Yulico with UBS.

A couple of questions on -- I was hoping to get, for the senior housing operating, the rate growth year-over-year and then Q-over-Q?

Yes, it was, year-over-year, 3.5% and quarter-over-quarter was about 2.5%.

Okay. And then going back to the Merrill Gardens as it's being transitioned to Emeritus, can you talk a little bit about how that portfolio did in the second quarter year-over-year? I think that was a portfolio that had lost occupancy, regained occupancy. I'm wondering how that performed, I guess, year-over-year since it's about 25% of the senior housing operating pool, same-store pool?

Right, it's a portfolio that's mostly independent living. So it did suffer from an occupancy standpoint over the last few years. In the past years, the housing markets recovered, it has started to pick up, it's also concentrated in California and the West Coast, so markets that were particularly troubled by the housing market. Again, it's definitely moving in the right direction and we're confident that Emeritus is going to do a great job with it.

But was that -- I mean, in the second quarter -- I mean, was that -- did that portfolio do better or worse than the average same-store NOI growth for the senior housing operator?

Yes, Nick. It actually is coming back nicely due to the occupancy rebound you mentioned. So at least margins are up year-over-year, occupancy is up in that portfolio and actually, NOI on the second quarter of '13 versus the second quarter of '12 is actually a little bit above the company, Health Care REIT company average for the quarter.

Okay, okay. So that's just -- what I was trying to get at is that -- so that the -- I mean, the 8-point -- the over 8% growth you did in the second quarter in senior housing operating, part of that was due to, I guess, some increased occupancy that the Merrill portfolio, which then is going to, I guess, be removed from your same-store in the third quarter or at least by the fourth quarter?

It depends when it closes. We think the transaction will close within the next 60 days. So it's just a matter of the timing.

Okay. And just one last one. I mean, I don't know if you're able to do this now, but is it possible to get an update, I mean, based on all the, meaning you guys have done a lot of acquisitions now, on your breakdown of units in IL, AL, memory care and the RIDEA portfolio versus in the triple net?

Yes. Rough numbers, the RIDEA portfolio is about 50% independent living; roughly 35%, assisted; and the balance is memory care. And then in the triple-net senior housing portfolio, it's more like 50% or 55%, assisted living; in the neighborhood of 30%, independent living; and then, the balance is memory care.

Your next question comes from Emmanuel Korchman with Citi.

Just -- if we looked at the Avery transaction, I know you said they were their newest assets. What was kind of the selection process like? Was it them approaching you or marketing those new assets, or was that kind of the part of the portfolio that you wanted?

Yes. Avery is a privately-owned company that was backed by private equity in the U.K. So we've maintained a close relationship with the management team as well as the previous owner. So it was off market principal to principal with us in combination with the management team deciding that we'd like to go forward as partners. So we bought out their real estate and the management team bought out the operations on these 14 assets, and then we're going to develop roughly 4 properties a year going forward that we'll acquire upon opening.

Got it. And then, George, in your opening remarks, you mentioned in the pipeline for the rest of the year, that there's significant portfolios out there. I know it's a bit early and you guys don't talk about future acquisitions much. But could you give us some detail of what that comment was referring to?

Well, we're still a fixture in the senior housing arena and we have our discussions with a number of operators, don't know if we'll get home or not. And then, of course, we do know that we have a significant flow of projects, both acquisitions and development from our existing operators. So we're very pleased with our potential pipeline but we're not in a position right now to identify any.

Okay. Then the last one for me, given the significant growth of your portfolio or your company over the last year, and very solid same-store operating numbers, have you guys looked at sort of a pro forma same-store number? So in the senior housing that 8.4 would've been, what? If the properties you've acquired had been same-store? Is that up, down, sideways?

It's probably about the same. I'm just ballparking it based on the assets that aren't yet in the pool like Revera, Chartwell, Sunrise, I mean, they're all -- those are the big ones. Belmont Village, they're all -- Brookdale in the neighborhood of 8%. So I think it's about the same.

Your next question comes from Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Just a quick one here. In looking at the lease expiration schedule in 2014, it looks like you have about, I think, it's either $20 million or $25 million of rents coming due on the triple-net senior portfolio. I was wondering if you could just kind of comment on how you see those rolling?

Yes, it's primarily 1 big portfolio in the mid-Atlantic. It's a really high-quality real estate. Payment coverage is right around 1.0, so it's a portfolio that we expect to renew at existing rental rate plus the increaser. And if the operators surprised us and didn't renew, we'd have 0 trouble releasing those assets. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. Then, one last one. For the $138 million that you said was closing in 60 days, I know it's a small amount, but is that in guidance or is that x guidance?

It's in our guidance, Mike.

Your next question comes from Todd Stender with Wells Fargo.

Scott, the coupon you quoted for what you could achieve on a new bond offering, I think it was 4.3%. How much has that moved since mid-May? And about -- where would the change be in your required returns on new investments. Just seeing if they've moved in lockstep?

We're always looking at our cost of capital. I think the low we probably saw prior to May 22 was maybe in the 3.5% range on a potential new 10-year issue. The levels we're at now, again, around 4 3, it's probably right about where we're at, at the beginning of the year, notably. So Scott Brinker here can help comment how we think about transactions, which clearly, watching the debt and equity markets has resulted in a lot of discussion in our investment committee meetings as we try to continue to invest at accretive levels of positive spreads and accretive to NAV. But Scott, you want to give a little more color around how we think about the cost of capital?

Yes, I would say the arbitrage between public and private cap rates has certainly declined a little bit. I mean, if anything, we hoped that the recent increase in cost of capital will result in cap rates not falling any further. There's a point where it seems like every transaction that we heard about was [indiscernible] the cap rate than the last one. So I'm not sure if cap rates are going to increase or not, maybe. We're just glad that they're no longer falling.

Okay. That's helpful. And then just switching to the medical office building portfolio, within the same-store pool. Just trying to get an indication of how the health is at the top line. Can you break out what the growth rate was of the base rent, exclusive of any tenant reimbursements?

Todd, this is the medical office portfolio?

Yes.

Yes, the operating expense growth was in the 2% range, and the NOI growth was 3%. So you've got in-place rent escalators in the 2.5% range plus the pickup in occupancy generates the 3% NOI there.

Do you guys break out what the base rent change was from the top line?

We don't. We have such little lease rollover that the change in base rent year-to-year is generally going to reflect the in place lease escalators, which is in the 2.5% range.

Your next question comes from Rob Mains with Stifel Nicholas. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: First question, Scott. I can't remember which one, but I can just say Scott. You mentioned that there's a lot of buyers out there, still, for assets. Are you seeing anyone new or different in there in terms of competition, non-public REITs, institutional buyers, private equity or is it mostly the same people you've been seeing for the last, say, year or 2?

Yes, it's all the same people plus it's non-traded REITs for sure, 5 or 6 of them that are aggressively looking at senior housing, skilled nursing and medical office. There are pension funds, private equity and certainly, the public REITs, and even some operators. So it's a time where it's particularly important to have a lot of relationships in the industry. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Is it -- did you feel like it's become more competitive than it was a year ago?

Yes. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. You've talked about your main asset classes. What are your thoughts about hospitals?

We have almost 70 health system relationships that are sponsors of our outpatient medical office buildings. I'd say we're extremely bullish on the outpatient sector. The in-patient sector, I think, you need to be a little more careful with. The volume trends are not positive, a lot of the real estate quality is not very good, hospitals are closing and I think, more will. But if it was the right health system with a good quality real estate, with the triple-net lease structure, I think, we'd for sure take a look at it. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, did I get this right that the same-store senior housing in the RIDEA, REIT annual growth was 3.5%?

Correct.

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

So, George, during your commentary, you mentioned that you had started to adjust pricing a little bit simply because of the increase in your cost of capital. Could you talk a little bit about that in regards to all the key property types? And just -- when you say adjust in pricing, you're not kind of looking for deals that cap rates up by 25 bps or just kind of a general sense of what your -- what you're indicating -- what you're suggesting.

Well, actually, I didn't make that comment in my commentary, but we did already comment on that. And that is, as Scott Estes indicated, that is part of our investment process, we have to look at our aggregate cost of capital vis-à-vis the returns on any assets. And we do that every week. And I don't know if Scott Brinker, if you want to talk about any particular asset class but it is clearly a determining factor in terms of doing a deal or not doing a deal. But if we look at it more on the long term, of what is our long-term cost of capital versus the long-term return from particular assets. Scott, any more color? I think that's the answer, though, Tayo.

So when you said pricing is up 5%, 10%, is there any kind of indication at this point or you're still kind of feeling things out at this point?

I think it's the latter. Feeling things out. So the recent change was over the past 60 to 90 days, so we'll see. As of today, I don't think pricing again has gone up. It just is not going down.

Tayo, this is not a science. Even with our existing relationships, we're going to have to look at what our current cost of capital is and to deal with them in a very upfront way and get to a good result for both parties. I will tell you this, that if the rates continue to go up, there probably will be a lag between cap rates following. There always has been. And we're going to have to be very, very careful about how we price any new investment.

Your next question comes from Jeremy Metz with Deutsche Bank.

Just 2 quick ones. In terms of the investment markets, given -- have you seen any increase in actual deal flow or deals being talked about as sellers look to get off the sidelines ahead of further potential rate increases and capture what seems to be pretty aggressive pricing right now?

I don't think it's meaningful. There could be, from time to time, that the company, that may have a 2-year or 3-year time horizon, that might ultimately decide to shorten it to take advantage of better pricing. But we haven't seen a lot of it.

Okay. And then just one other one. You only did a little bit of dispositions this quarter but the yield was quite low compared to where you did in the first quarter. Just -- is there anything going on with what you sold this quarter? And then, just the expectations for what you have left to sell in the second half of '13.

Jeremy, the expectation for the second half of '13 is still probably in the 9%-ish range. And this quarter was a little lower because we actually got out of an additional entrance fee community this quarter and we had already talked about how the rents on those were a little bit lower.

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

Does the transfer of the Merrill Gardens portfolio from RIDEA to triple net, should that signal to us a change in your portfolio allocation between the 2 pieces? Or does it free up some additional capacity for you to buy more RIDEA in the future?

I don't think it signifies anything at all about our commitments to the best operators. And our willingness in the right circumstances to do either a RIDEA or a triple net. And I think, I also indicated to you earlier in the call, Karin, that we selected with Merrill Gardens, Emeritus, because it seemed to have the right footprint to really take over the Merrill Gardens portfolio and move it along quickly. But even there, we added a gross revenues concept to allow us to capture some of the upside as well.

So we shouldn't think that you'd be biased to do more RIDEA in your next tranche of acquisitions to fill the gap. It's still going to be on a deal by deal basis?

Yes, deal by deal basis.

At this time that was our last question. This does conclude the conference. You may now disconnect.

Thank you.