Welltower Inc. (WELL) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Third 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 Jeff Miller, Executive Vice President, Operations & General Counsel. Please go ahead, sir.

Thank you, Brooke. Good morning, everyone, and thank you for joining us today for Health Care REIT's third quarter 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, Jeff, and good morning. We've all become accustomed to capital and real estate markets that are increasingly volatile because of fast-moving economic developments and significant uncertainty. At the highest level, of course, we are all familiar with the political wrangling, the Affordable Care Act rollout, Federal Reserve actions and international events that have impacted capital markets and fostered uncertainty about interest rates, reimbursement and health care delivery. At the industry level, we have seen significant capital inflows and growing developer interest in health care real estate and, as a result, cap rates have tended to remain at historically low levels at least for the best-quality assets. At the same time, the cost of capital for REITs has remained relatively low and very competitive with other capital sources. And against this background, there are 4 important messages that I want to convey to you today. First, our investment thesis continues to prove out quarter after quarter. Because of our strong relationships, we were able to close on gross new investments of $1.2 billion in the third quarter that are immediately accretive. That brought our year-to-date total to $5.3 billion. Because we are in the most dynamic markets and have partnered with outstanding operators, our same-store NOI growth this quarter was 3.7%. Also, because we have invested predominantly in private pay assets, we have been able to minimize the drag from reimbursement cuts and uncertainty. We have a good mix of shorter- and longer-term leases and also a good mix across geographic regions and property types, all designed to provide excellent short-term growth, while opening the door for greater upside in an improving economy. Second, the Health Care REIT platform, which is our unique combination of people, processes, technology and business culture, has emerged as an industry-leading platform. Let me point out just a few notable accomplishments this quarter that illustrate that point. Today, we will issue our first sustainability report, which documents work we have been doing on a number of fronts. I encourage you to visit our website later today to review it. Also, through the efforts of our relationship teams, we've arranged for operators to voluntarily participate in a group purchasing organization that could yield meaningful cost savings in food and other items. This is in addition to the property insurance program that we have already institute and have discussed on previous calls. At the same time, our relationship teams have developed state-of-the-art benchmarking tools to help us manage our portfolio. So in short, our progressing platform is an important reason why we can deliver consistent returns in a volatile market and provide tangible value to our partners. Third, we will continue to be agile and entrepreneurial in addressing market challenges. These include the needs to develop digital care plans, reduce costs, deliver care in the lowest-cost settings and implement electronic medical records. We believe these challenges present major opportunities for us. Through our industry affiliations and an emersion in health care, we are well-positioned to capitalize on these opportunities. Fourth, and very importantly, you should expect us to continue to invest in strategically important assets. We are not sitting out this market, although we are going to be selective in our investments. Specifically, when there are opportunities to grow in important markets or with important operators in health systems, we will seize that, and we will not hesitate to develop where and when demand justifies it. We take a long-term investment view. We will always balance strong year-over-year growth with strong long-term growth in order to maximize shareholder value. I will now turn the call over to Scott Brinker, who will discuss our investments in more detail, and to Scott Estes, who will review our financial performance. Thank you. Scott?

Yes. Thank you, George. Good morning, everyone. I'm pleased to share the highlights of another quarter of internal and external growth. Our portfolio is generating consistent superior results, as evidenced by 3.7% growth in same-store NOI. We also invested $1.2 billion in a Class A real estate with an 8% initial cash yield. Our relationships continue to generate off-market accretive external growth. I'll start the portfolio review of senior housing, which represents 60% of our income. We've got a good mix of short- and long-duration leases, which allows us to deliver an attractive combination of growth and stability. Performance continues to be exceptional. Same-store NOI in the operating portfolio grew 9.4% over the prior year, well above budget, driven by a 3.6% increase in rental rates. The short duration of the leases allows us to capture the full benefit of this growth. Results in the U.S., Canada and the U.K. have all been strong, and our Sunrise investment is on target to meet or exceed a 6.5% yield in the second half of the year. Our triple net senior housing assets, which are churning out steady growth, are a perfect complement to our operating portfolio. Same-store NOI increased 2.8% over the prior year and we expect similar increases going forward due to contractual escalators. We get a lot of questions about new construction and, of course, we're focused on it as well. Supply and demand in senior's housing is all about the local market, so we monitor activity in every one of our locations. Here's what we're seeing: 58 of our nearly 700 season -- senior housing facilities have new supply entering their market area; 35 of those 58 are either in a triple net master lease or are a different service type than what is being built, so any impact on HCN will be negligible; that leaves just 23 facilities, representing only 2.6% of our income, where we'll be directly impacted by new supply. This is just one example why we built a diversified portfolio. It's also why we partner with the sector's premier operators, they'll be ready to compete with the new supply. The growth in the senior population and the improved economy and housing market will also help absorb the new supply. The takeaways that we expect continued strong performance in our senior housing portfolio. Moving to triple net skilled nursing. Same-store NOI increased 3% over the prior year, consistent with our long-term expectation. Payment coverage after management fee is unchanged from last quarter at 1.33x. Our operators in Genesis, in particular, are effectively managing through a challenging environment. Rate growth and expense control are offsetting weakness in occupancy. I'll wrap up the portfolio review with medical office, which represents 14% of our income. This segment is delivering steady growth. Same-store NOI increased 1.2% over the prior year. Our portfolio continues to have industry-leading occupancy and rental rates, a testament to its quality. The investment marketplace; it's active across the continuum. Cap rates for high-quality senior housing and medical office portfolio's remain in the 6% to 7% range. We're seeing strong interest from private REITs and private equity. The public REITs are also active. Cost of capital is virtually identical to 1 year ago. The cost of debt has increased, but so have our stock prices. Absent material changes in the capital markets, we don't see cap rates for widely marketed deals moving higher, but keep in mind that public auctions are not our focus. As an example, we invested $1.2 billion last quarter into Class A real estate headlined by investments with Sunrise, Avery, Silverado and Vibra. The initial cash yield is projected to be 8%, with annual NOI growth of more than 3%. The exceptional yield is due to favorable prices on the final round of Sunrise joint venture buyouts and the off-market nature of the negotiations. We also closed the $173 million acquisition of Merrill Gardens interest in 38 senior housing communities that we subsequently leased to Emeritus under a structure that provided HCN the downside protection of a lease, with much of the upside of a RIDEA investment. The operator transition went smoothly and the communities are exceeding expectations to date. Looking forward, we have active dialogue with more than 30 of our existing operating partners, for us, a powerful source of accretive deal flow in the U.S., U.K. and Canada. We round out our investment platform with new development. We've got $400 million of projects underway at initial yields that exceed acquisition cap rates by at least 150 basis points. Taking a longer-term view of the marketplace, private REITs and private equity tend to have relatively short holding periods. In fact, they were the sellers on many of our past acquisitions. When we're outbid, we can often walk away knowing that the assets will become an acquisition candidate before long, hopefully, with a better spread on investment the second time around. The same is true of new development that this being funded by developers in private equity. We view these buildings as future acquisition candidates. More important, health care real estate is a massive, yet fragmented, market. This creates enormous acquisition opportunities. Consolidation will continue. Over time, market forces will drive high-quality health care real estate to the most efficient owners, which we believe are the publicly traded REITs. The only variable is timing. We intend to be present, but patient. That concludes my remarks, and I'll turn the call to Scott Estes to discuss our financial results.

Thanks, guys, and good morning, everyone. I'm happy to report that our financial position remains strong. Our capital structure continues to provide the consistent and resilient financial results you've come to expect from Health Care REIT. I have 3 simple points that I'd like to emphasize today: first, our recent $400 million debt offering provides incremental balance sheet flexibility and liquidity; second, the significant $5 billion of investments completed year-to-date is now translating into more meaningful earnings growth, both for this year and next; and third, our confidence in future earnings growth has enabled us to announce a 4% increase in our 2014 dividend payment rate today. I'll start with some general housekeeping items related to our balance sheet and liquidity. I'm pleased with where the balance sheet stands today. As of September 30, our net debt-to-undepreciated book capitalization was 42.2%. Currently, our debt to adjusted EBITDA is right at the 6x level, while our adjusted interest and fixed charge coverage improved to 3.6x and 2.8x, respectively. These metrics are all in line with our strategic targets. In terms of capital and liquidity, we continue to enjoy solid access to the capital markets and have efficiently raised capital to fund the majority of transactions announced year-to-date. There were 3 significant capital events which have occurred since I last spoke to you in August. First, we issued just over 1 million shares under our dividend reinvestment program during the third quarter, generating $62 million in proceeds. Second, $219 million of our outstanding 3% convertible debt was redeemed or converted during the quarter, leaving $275 million outstanding. And finally, in early October, we were able to successfully raise $400 million of long-tenure unsecured debt price deal of 4.6%. This debt fits nicely into our maturity schedule and speaks to the ongoing support provided by the capital markets. Let's now look at the anticipated line of credit borrowings through year end, which will exclude the effects of any additional investments. So starting on September 30, our balance sheet shows that we had $165 million in cash and $848 million borrowed on our credit lines, resulting in $683 million of net line borrowings at quarter-end. After taking into account the $393 million of net proceeds from our October debt offering, these net borrowings are further reduced to $290 million. For the remainder of the year, we expect an additional $375 million of line borrowings as a result of: first, $300 million in unsecured debt with a 6% coupon maturing in November; an additional $75 million of secured debt we intend to pay off; about $100 million of projected fourth quarter development funding; less $100 million of anticipated fourth quarter disposition proceeds. So as a result, we're on track to have about $665 million of net line borrowings at year-end, providing a significant $1.6 billion of line availability net of these borrowings. Despite the recent market instability, our incremental cost of capital remains near historically low levels and has actually improved somewhat over the last several weeks. The weaker economic data and the Fed's potential delay in tapering asset purchases has contributed to lower interest rates in, generally, health and health care REIT stocks. Thus far, in 2013, our equity has generally performed in line with the REIT sector, generating a solid total return of approximately 10% year-to-date. Our incremental cost of debt also remains attractive based on current treasury yields and spreads. As a result, we continue to have access to attractively priced capital as we source new investments through year end and into 2014. Moving now to our third quarter earnings results. Our continued success on the investment front has translated into more significant earnings growth. Normalized FFO increased to a record $0.97 per share for the quarter, representing a strong 7% increase versus last year. Third quarter normalized FAD per share of $0.86 represented an increase of 5% year-over-year. Our FFO and FAD payout ratios for the quarter declined to 79% and 89%, respectively. Results were again driven by the combination of strong internal growth in the form of a 3.7% increase in same-store NOI, and external growth in the form of $6.7 billion of net investments completed over the last 12 months. And, finally, I'll conclude today with an update on our dividend payments, our enhanced disclosure efforts and guidance. We declared our 170th consecutive quarterly cash dividend for the quarter ended September 30 of $0.765 per share or $3.06 annually. This represents a 3.4% increase over the dividends paid in 2012 and a current dividend yield of 4.7%. As we move into 2014, our confidence in our portfolio's internal and external growth has allowed us to announce a 4% increase in our 2014 dividend payment rate. Our Board of Directors has approved a 2014 quarterly dividend payment rate of $0.795 per share, or $3.18 annually, beginning with the February 2014 dividend payment. Importantly, we expect that our rate of earnings growth next year can exceed our rate of dividend growth, allowing us to further drive down our payout ratios. Before turning to guidance, I'd like to point out several enhancements to our supplement this quarter, as we continue our concerted efforts to enhance our disclosure. Most notably on Page 16, we created a new page assisting NAV calculations, which provides Health Care REIT's pro rata share of both NOI and debt. Next, on Pages 5 and 8, we have added sequential same-store performance data over the trailing 5 quarters for both the seniors housing operating and life science portfolios. And finally, on Page 2, we provide new disclosure detailing our portfolio NOI concentration by asset type, and that's broken down by both country, as well as ranks by our top 20 MSAs. Turning last to guidance. We are increasing the midpoint of our FFO and FAD per share ranges by $0.02 today, based on the strength of our investment success and earnings results year-to-date, offset only slightly by our $400 million October debt offering. Both our new normalized 2013 FFO range of $3.74 to $3.80 per share, and FAD range of $3.29 to $3.35 per share represents 6% to 8% growth year-over-year. We continue to expect blended same-store cash NOI growth for the full year 2013 of 3.5%, driven by the continued strength of our seniors housing operating portfolio, which is now projected to generate very strong same-store NOI growth of approximately 7% 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 and, thus far, we've completed $407 million of dispositions at a blended yield on sale of 6.4%, including net gains on sales. And finally, we project a total of $286 million of development conversions this year at an average initial yield of 8.5%. Our capital expenditure forecast remains $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 remains approximately $107 million to $108 million for the full year, which implies approximately $27 million to $28 million of G&A during the fourth quarter of 2013. That does conclude my prepared remarks, but I would like to leave you today with my note of confidence that we remain on excellent financial footing as we head into 2014. So at this point, operator, we would like to open the call up for questions please.

[Operator Instructions] Your first question comes from Juan Sanabria with Bank of America.

Scott, I was just hoping you could help us think about your balance sheet flexibility to do acquisitions going forward and how we should think about that? And sort of remind us again what are you targeting from a balance sheet perspective, most importantly, is it the level of leverage to undepreciated assets or more sort of a debt-to-EBITDA number?

Juan, I believe we do look at all of those. Our general targets are 40% debt-to-undepreciated-book-capitalization, net debt-to-EBITDA of 6x or below; interest coverage and fixed charge coverage consistent with where we're at today, we're happy with that. And as a reminder to everyone, we were pleased with the ratings upgrade we received in the third quarter, the BBB flat across-the-board, so we're always trying to balance the appropriate combination of debt and equity. I believe, as I detailed in my prepared remarks, we have some nice flexibility with about $1.6 billion of pro forma availability heading into year-end. But as always, we look at the debt and equity markets and again, try to raise money when we can, proactively, and do it around attractive, accretive acquisitions.

Okay. Great. And could you just comment just generally on sort of how you see the acquisitions market in terms of what you guys are thinking in terms of cap rates from here? And just what we should be thinking for -- relative 2014 to 2013, in terms of any sort of comfort you can give us on continued growth for the acquisitions?

Juan, this is Scott. The acquisition marketplace is very active and there's a lot of opportunity. The issue for us is a couple of things. One, is being patient, so that we're paying prices that allow us to make money day 1 and over time. So there's no question in our mind that health care REITs, over time, will end up as much bigger companies than they are today, but we have to be patient and not pay prices that don't make sense. So that's point #1. Point #2 is that we really differentiate ourselves on the number of investments, whether it's acquisition or development, that we're are able to source through our existing clients. And that is a source of accretive deal flow for us that has been very meaningful over the past 5 years. We now have a stable of operators. Seniors housing, medical office space, skilled nursing, they come to us with their opportunities to grow in their existing markets or to put up new supply where they see a need. And I think you'll see us focus on those existing clients going forward and selectively adding new ones to our portfolio.

Okay. Great. And just lastly, I don't know if this is, maybe, for George. Is there any update to sort of the succession planning, and you've brought it up at your Investor Day a few months back, and sort of what should we be thinking about in terms of timing? If you have anything to share on that front.

No. In response to your question at our Investor Day, I indicated that I was going to enter into a new 3-year contract, essentially, and what happens after that, will perhaps be driven more by the marketplace and what necessarily capabilities we have at that point.

Your next question comes from Nic Yulico with UBS.

I had a couple of questions. Turning first to the same-store senior housing operating segment. I think you said you had 7% as your guidance for this year for the same-store there. And I was -- I was hoping you could talk a little bit about the non-same-store assets? How they've been performing on an annualized basis this year, since you have about 2/3 of your total senior housing operating assets not in the same-store? And if it's possible, it'd be great to have a breakdown on same-store NOI, same-store revenue and same-store expense trends for these non-same-store pool?

Yes, we wait -- this is Scott Brinker speaking. We wait 15 months to bring assets into the same-store pool just because we didn't own these assets 12 months ago. So over the next 6 months, we'll add the Sunrise portfolio in the first quarter, the remainder of the Belmont Village assets in the first quarter, as well as Benchmark -- I'm sorry, Brookdale, in the first quarter and then, in the second quarter of next year, we'll add Revera. Overall, each of those 4 is performing at or ahead of expectations. Results are strong in all 3 countries that we invest in: U.S., U.K. and Canada. At Sunrise, in particular, is on track to meet the 6.5% initial yield that we've talked for the second half of this year.

Okay. And -- but -- I mean, as far as your 2013 results so far, I mean, how is the overall senior housing portfolio tracking? Is it below -- is it at 7%, which is where the same-store is? Or is it below that? It's just -- as we're thinking about how to figure out where the kind of true growth is of this segment, it'd be helpful to have some more statistics for the non-same-store.

Yes, we're going through our budget for 2014 right now, so we'll have better information to share the next time we talk. But, in general, those are high-growth portfolios, so we're not expecting the addition of those portfolios to negatively impact the performance of the same-store pool.

Okay. Maybe just another way to ask on this is, is -- I mean, what is -- I mean now that you've had maybe not quite a year but -- and you've had a decent amount of the Sunrise under your ownership. I mean, how has that portfolio been? When you talk about the 6.5% yield going forward, what was the original sort of growth expectation for that portfolio when you underwrote it? So that we can have a feel for -- in 1 year, how much NOI has been growing there.

Yes, it was in the mid- to high-single digits, so it's performing in line with our expectations. Occupancy across the portfolio is trending in the right direction. The rate growth continues to be substantially above any benchmarks that we can find and expense growth is in the range of 3%.

Okay, great. And then I appreciate the new part of the supplement showing all the MSA exposures by property segment. I was hoping you could talk a little bit more about which markets concern you most for senior housing supply? I think you said only 58 of your properties are facing supply? And I'm wondering if you could just talk a little bit more about that, because you have almost 700 senior housing properties and you do have exposures to some places where there are some supply. And then, as well, the -- hoping to get a little bit more clarity on that -- those remaining buckets, which are listed on the the MSA -- under the MSA segment for senior housing, because they account for about 50% of your NOIs and those of your senior housing NOIs, in those remaining buckets?

Yes, Nick, we tried to, in the prepared remarks, cut through some of the clutter that could be seen in the supplement where we show NOI by MSA and really focus at the community level. Because, ultimately, supply and demand is very much a local business. So we looked at the new construction in each of our 700 local market communities around the U.S., U.K. and Canada, and evaluated new supply. And we found that 58 of our 700 buildings do have new construction entering their primary market area. But we were able to determine that more than half of those, 35, are either in the triple net master lease or the new supplies a different service type than we provide. For example, independent living is the new supply, while our building might provide memory care services. And that left just 23 facilities in our entire portfolio, where there's new supply entering the primary market area. And that's -- those assets represent less than 3% of our total income.

Okay. And then just a quick follow-up on that. I mean, are you saying then that when you look -- first of all, when you're looking -- I mean, this is the MSA breakdowns that if we're looking at, NIC map data, that it's the same MSA breakdowns? And then when you're looking, you're saying, at a specific property level, I mean, are you saying that using a certain mile radius ring or, I mean, are you -- if there's a lot of supply going into Houston, but it's on -- if it's 10 miles away from your properties, is that getting excluded by you guys? It's not being impactful? Or -- anything more on that will be helpful.

Yes. That's right, Nic. So we looked at the local market for all of our properties that tends to be around 3 miles, given the metro locations of these buildings. So something that, say, in Houston, was 10 or 15 miles away, we would not count that as something that is competitive.

Your next question comes from Emmanuel Korchman with Citi.

Maybe, Scott, we'll just stick to that supply commentary for 1 second longer. In those 23 assets or markets, I guess assets, do you see the new supply impacting occupancy or rate or both? So kind of where do you think you take the hit if a new asset opens down the street?

In most cases, it's either both or neither. We included all 23. The reality is, in a number of cases, there's either a much different acuity level being provided. For example, the Silverado community often receives most of its referrals from other memory care communities, or a different price point. So we could further narrow the 23 down in terms of what's truly competitive, but we've chosen to try to present just a conservative assessment of new supply in the markets.

If we go back to sort of your earlier comment when you talked about your longer view -- longer-term view for the company, I made a comment that a lot of the acquisition candidates would sort of round trip or come back out to the market. I was a little bit caught off guard by your comment of it being a better spread than -- was that just a fact of the company being bigger? What else do you sort of project that would -- the spread will get better? And secondly, if there are assets you like and you think they're going to come back, unless you think that the pricing is going to be off, why wouldn't you buy them today?

Yes, it's really -- the spread that I'm referring to, Manny [ph], is the -- our cost of capital against the yields that we can invest at. So over the past 3 years, there's been a pretty meaningful positive spread on investment. And over the past year, our cost of capital is about the same and cap rates have declined. So the arbitrage from our cost of capital against private market cap rates is just narrower than it used to be, so we're being cautious about where we invest our money.

What do you see changing that, sort of, in the longer-term world?

Well, right now, cap rates are being depressed in large part by the private REITs who have a mandate to invest huge sums of money as quickly as they can. So there is a source of capital in the marketplace right now that isn't always present and, at some point in the future, probably won't be present. And at that point, we would expect that spread on investment to be more positive than it is today. And I think you'll see us more aggressive if that's the case.

And then my last question, just can you remind us on your view of going into sort of new markets, whether it be Asia or elsewhere? I guess, you guys are comfortable with Canada and the U.K. at the moment, but where else might we see sort of HCN banners going up?

Chapman. I think that we're going to be studying -- continuing to study international markets. We've already identified certain other markets in Europe and elsewhere that are possible, but we're going to do a very exhaustive study on that before we commit and before we give any more information to The Street. But we do think that we have the opportunity to be the largest and highest-quality investor in real estate around the globe.

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

Hey, just a quick follow-up on the supply statistics you're giving. I know you defined the service area as 3 miles, I think you said. What percentage of the residents in your communities come from that service area?

Jeff, it's Scott. I don't know the exact percentage, but we picked 3 miles because that tends to line up pretty well with where residents actually come from for these communities. You're clearly going to get some residents from outside of that primary market, but just keep in mind that, for the most part, our communities are located in top 31 MSAs or coastal markets, so they tend to be pretty dense populations. So 3 miles to us seem like a pretty reasonable estimate of what would represent a primary market area.

Right. So you don't exactly, but you would estimate somewhere over 80% or 90%? Something like that?

It's probably in the 2/3 to 80% range for a typical community.

Okay. Okay. And then can you break out your same-store operating senior housing growth a little bit more in terms of lease-up in stabilized communities?

Yes. Of the 122 communities in the same-store pool, 5 of them are still in lease-up, with occupancy in the low-70s, and the stable portfolio is right around 90%. So for the most part, when you look at the same-store portfolio, you are seeing the stable portfolio, there just aren't that many lease-up assets. And last quarter, the stable portfolio actually had a slightly better performance than the lease-up portfolio in terms of NOI growth.

Okay. Okay. And then last on the skilled nursing portfolio. This quarter you had a little bit of a lower Medicare and private pay revenue mix. I know there's some sequester effect, but it's going against what you talked about when you acquired the Genesis portfolio of a continually improving Q-Mix. Can you talk about where you think Genesis is on their Q-Mix transition and where you'd expect them to be over the next year or 2?

Jeff, it's Scott again. It's definitely a challenging environment. Genesis is performing better than most skilled nursing providers, so our payment coverages have held up for the most part. The sequester, for sure, had a negative impact and the level of hospital admissions has had a negative impact on their Medicare mix as well. So I think that's -- those are the reasons for the trends that you're seeing. We do think, over time, that picks up. But clearly, there are some challenges in the operating environment that are going to make it difficult to meet sort of those original expectations.

One other thing, Jeff, this is Scott Estes, that I would add is the -- one pleasant surprise has been the great rate growth in Medicaid, as well Medicare, relative to their budgets. So that I think bodes well, looking into -- over the next fiscal year. I think Medicaid rates at their facilities are actually up in excess of 3% and Medicare is up a little bit over 1%. So those are some other positive factors.

And you expect a similar rate growth going into next year?

Yes. That was basically for fiscal '14.

Oh, for fiscal '14? Okay.

Yes.

Your next question comes from Jack Meehan with Barclays.

I want to start with the group purchasing organization you announced this morning. What are the services that you're including there and what do you think the opportunity is there, either in terms of improved cash flow or coverage in the portfolio?

Chuck Herman?

Yes. It's been a voluntary program that we've implemented. We first started with the -- an insurance program, where we went out to the property insurance market and we were able to save pretty significant dollars as it relates to what they were able to get in the open market, low double-digit kind of savings, and we've increased that over time. I'm not sure the exact percent that are involved with the program this year, but we did increase the program over the first year's implementation. And then the second one that we have implemented is a group purchasing program as it relates to food. And again, this is a voluntary program. About half of our operators have gone and opted in to the program. So we're just in the rollout phase currently. So it remains to be seen exactly what the savings will be. And now we're in the process of implementing a capital expenditure program as well, trying to go out to the market and lever our portfolio so that we can get the most effective -- the effect -- most effective group purchasing possible there. I mean, I think what operators enjoy about our program is not only the group purchasing but, also, our executive forum and the ability to improve best practices because of the sharing that we do there. And we had a very successful best practices sharing meeting at the last month's NIC conference in Chicago.

Got you. And then have you looked at the rates that you're spending? Or that you think that you can purchase through that relative to where your operators are doing it today? Do you think low double-digit savings is possible for that as well?

We're not exactly sure at this point in time. Certain folks have different preferences to different vendors. So each operator has a little bit different take on whether or not they think it's going to be effective or not. But what we do, because we are able to benchmark all of our statistics, we are able to go and go out to the market and explain to them exactly what the food spend is and we think we can get the best prices. But each operator, again, kind of opts in or opts out as it relates to it, but most are taking it very seriously.

Got you. And then just switching topics, the $95 million of possible acquisition in the quarter, it sounded like that was with Vibra. Are they LTAC and was that related to the Kindred acquisition in the quarter?

It was. This is Scott Brinker, speaking again. We have a long relationship with Vibra. Our business model is to identify and then provide capital to the premier providers in each segment. And although the LTAC space is not one that we have a lot of exposure to, it's less than 2% of our NOI, we do have an existing relationship with Vibra that's been very successful. They've proven to be premier operators for stabilized properties, as well as turnarounds. So we were able to buy 5 -- I'll call them post-acute facilities because they really are a combination LTACs and skilled nursing; good geographic overlapped with Vibra's existing portfolio; 2x payment coverage; the initial lease rate of nearly 10%; and best news use of all, we added all 5 of those buildings to the Vibra master lease, which already had 15 buildings with to 2-plus-times payment coverage after management fee. And then, in addition to that, we have 5 standalone leases, all LTACs, primarily holdovers from the Windrose portfolio 7 or 8 years ago that were in, again, individual leases with near-term maturity dates. We were able to add all of those 5 standalone leases into the Vibra master lease, which provides significantly enhanced security, extended the maturity date by 11 years and substantially increased both the base rent, as well as the increaser. So it was a acquisition that allowed us to support a long-time customer and also to make, we think, a pretty strong return for our shareholders.

Got you. And I know the strategic focus has clearly been on private pay assets. What gave you the comfort around potential changes in LTAC reimbursement -- that gave you enough confidence to close the deal?

Yes, the big thing is the quality of Vibra's operations. A number of things have been talked about for changes in LTAC reimbursement, whether it's patient criteria or 25% rule, we sort of looked at all of those possibilities. And we think the potential impact on Vibra is very small and the impact on us is completely negligible, given the strong payment coverage. Just as an example, if they implemented the 25% rule tomorrow, and Vibra didn't make a single change to their operations, the impact on payment coverage would be about 3 basis points, 3. And our payment coverage is well above 2x after management fee. Second is patient criteria. And we agreed that LTAC should be caring for appropriate patients, if somebody can be cared for in a skilled nursing facility, that's where they should go. Now there is case mix index, in comparison to national average it's substantially higher, which means that they're already caring for the types of complex patients that CMS wants them to care for. So these aren't -- Vibra's not treating nursing home-type patients, they are providing value to the health care system, even with patient criteria, we think they would perform extremely well.

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

Scott, of the 58 properties that will likely be impacted by supply, how much will the assets be impacted? I guess, how much supply is coming online? Is that 1, 2 or 3 projects?

Well, it tends to be 1 new competitor for each of those 23. I can't think of any markets off hand where there are multiple new competitors.

So how much, I guess, of the supply in that 3-mile radius is being increased by that 1 asset?

Yes. It varies. An important distinction and it's -- so I'm glad you asked the question. Our buildings are not located in rural markets. When you're in a rural market and a new competitors opens, you can be doubling the amount of supply. And there just isn't that much demand in those rural areas. So we've strategically focused on big metro markets with dense population and a lot of affluence. So even when there is a new competitor and there might be of 5% or 10% increase in the total supply, and there might be a temporary decline in occupancy or rental rates, but, over time, those are the types of markets that can support new supply. And that's why we pick them and, more importantly, why we've acquired modern purpose-built assets, that we think will stand the test of time and operated by what we think are the premier operators in the sector. It's -- in senior housing, it's a combination of you need good real estate and you need good operations, and it's both, it's not either or.

Okay, and these projects will be done within the next 12 months or so?

Over the next 2 years.

2 years?

It takes -- so NIC tracks everything that's under construction. And then in Canada and the U.K., we just, with our partners, have identified all of the new supply. The typical project would take between 15 to 18 months from start to finish, and there will be some outliers, but that would be a good average.

Okay. And then can you give us some more color on the operating performance in the senior housing portfolio? Was there any specific locations, regions or markets that drove the results? Or was it pretty much broad-based across the portfolio?

It's pretty broad-based. One thing that we've noticed after 3 years of operating investments is that it's paid off to have a diversified group of operators. So from quarter-to-quarter, one may do a little bit better, one may do a little bit worse. But on average, we've been able to generate extremely attractive growth in the neighborhood of 8%, on average. And it's been remarkably consistent from quarter-to-quarter.

Your next question comes from Rob Mains with Stifel Nicholas. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: I just got a couple odds and ends left here. Scott, the $67 million CapEx guidance, that implies a pretty big number in the fourth quarter. I assume that, that seasonality, as opposed to a much higher level we should look at going forward?

I think that's right, Rob. We always see the fourth quarter as the highest quarter of the year. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then I noticed that the pricing in senior housing RIDEA portfolio went up pretty dramatically from the second quarter to third quarter. I assume that's because of the absence of the independent living Merrill Gardens assets. Do you have either same-store or non same-store year-over-year rate number that you can share with us?

Rob, this is Scott Brinker. You're asking for year-over-year rental rate growth? Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Yes.

Yes, it was 3.6% in the same-store pool. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I'm assuming, again, the reason why it went up from Q2 to Q3, that it was because of the absence of Merrill Gardens and, I guess, the addition of the assets that came on the quarter. But that -- no -- that was -- yes, because that's not same-store.

Yes. Rob, it was due to the elimination of Merrill Gardens. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Right. Okay. And then the small number, but I noticed that in the disposition schedule in the supplemental, you had one disposition that had no yield. Was that some sort of nonperforming asset, I assume?

Yes, it's -- Rob, this is Scott Brinker. It was a hospital in Texas that we just chose to be conservative in how we were recognizing or not recognizing income. And as it turns out, we were able to sell it for a small gain. So, I guess, we could have been more aggressive about recognizing income, but we just, year-to-date, had chosen not to recognize any income on that investment. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then last question. When you talked about the same-store being predominantly stable. The concern, obviously, comes up that you've been putting up some really good same-store numbers and we kind of wonder when that's going to regress to some sort of long-term average that might be a little bit lower than 8%, 9%. Any commentary around that?

Well, we're feeling the pressure too, Rob. Yes. It's a -- the performance has just wildly exceeded our expectations. So we guided people to 4% to 5% annual growth in that portfolio and it's done consistently 8%-plus. We don't think that continues forever, but we are confident that it will continue to provide growth that's well in excess of inflation and well in excess of what we could get under the triple net lease. So whether that's next year or 2015, I'm not sure, but we don't think 8% will last forever, but we are very confident that we'll continue to produce growth that beats inflation and the triple net lease. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Right. So there's no addition to the same-store bucket or anything like that, that you see running that into a wall?

No, the additions next year: Revera, Sunrise, Brookdale, I think all of those are either accretive or breakeven to the growth rate of the portfolio.

Your next question comes from Todd Stender with Wells Fargo.

Just a couple quick ones. My questions revolve around the medical office building portfolio. Just trying to get a feel for the general health of the segment. Can you talk about the change in rents, 1 and 2, the length of leases in the quarter on all renewals?

Yes, the -- this is Scott Brinker speaking, Todd. The renewals -- the terms have been longer than what we have budgeted, 6-plus years, without a whole lot of CapEx or tenant improvements that were necessary. So from that perspective, the activity on renewals has exceeded our expectations. On average, for the portfolio, our maturity date is about 8 years. And an important characteristic for our portfolio is that there is very little turnover, especially for the next 3 years. Less than 20% of our leases in total, over the next 3 years, rollover. So we feel like this is really a steady, predictable, stable base for our portfolio.

The only thing I would add to it, Todd, Scott Estes, is the NOI growth projection is about 1% to 2% for the year. And I'm in agreement with everything Scott said to his point. Only 5% of the portfolio is rolling specifically in 2014, so a really low number. And occupancy was down only slightly, 20 to 30 basis points, in the quarter but it's still, I think, the industry leading at 94.1%. And the commentary on that were it was just a handful of different smaller tenants that didn't renew, reasons like retirement and practice breakups that the guys expect the occupancy to be back up in the fourth quarter.

That's helpful. And then -- and that attributes to the decline on the retention rate, I assume?

Yes. To a slight extent, yes.

Okay. And then just going back to the change in rates. Have you guys disclosed what the rents moved to or were they flat?

Rents for the whole portfolio this year were up about 1%, 1.5%. So it's not a high-growth sector, but, again, we feel it's a nice predictable, stable base.

Just to stay on that theme, Scott. The 6.9% yield you got on the medical office building you purchased, what kind of growth do you underwrite on that? And where is it located? And can you give any -- the primary specs, what does it look like? Whether it's on campus, multi-tenant hospital affiliation, that kind of stuff?

Yes. Todd, it's in Boynton Beach, Florida. It is sponsored by the Bethesda Health System, one of dominant providers in that market area. They take the vast of the space. A big building, very much focused on out-patient care, so it has all the characteristics that we look for in a medical office building.

128,000 square feet.

Yes. And the growth profile tends to be in the 2% growth-per-year range.

[Operator Instructions] Your next question comes from Stephen Mead with Anchor Advisors.

Can you talk about the international portfolio from the standpoint of that the issue of contributing to growth and the kinds of returns? And then in terms of the kinds of segments that you would look at for sort of international investment, just in terms of managing risk and balancing return, what are your thoughts on that side?

This is Scott Brinker speaking. We entered Canada and the U.K. over the past 18 months and really that's an extension of what we're doing in the U.S. So our investments are focused on modern, purpose-built, private pay senior housing assets. In Canada, we have nearly $1.5 billion invested, with the 2 leading providers in that country, Chartwell and Revera. Our assets are located primarily in the top 5 metropolitan markets. It's really an independent living facility portfolio, there's not much health care provided. And to date, their performance has been terrific. We've received an initial yield on that investment well above 7% in total between Revera and Chartwell. So we feel like for a high-quality independent living private pay portfolio, the returns are very attractive versus what you would get in the U.S., with an attractive growth profile as well, that we think is accretive to, say, the overall at 3.7% that we reported this year. And then in the U.K., we have, again, over USD 1.5 billion invested to private pay seniors housing, primarily with Sunrise in Metro London. These are really the cream of the crop in terms of assets, all private pay. There is some lease-up potential as well, because the assets are so new. So again, attractive yield that we think is superior to what we could get in the U.S. for comparable assets and an attractive growth profile as well.

Okay. But I mean, is the contributing growth from the international, is that at a higher growth rate than with the U.S.?

Yes, these particular portfolios we think, again, are accretive to even the 3.7% same-store growth that we reported this quarter.

Well, I was just looking at the 9.4%, on the senior housing operating one.

Yes. Well they are major components of that, Chartwell in particular. So they are growing in line with that rate.

Okay. Okay. And then just in terms of that segment and the sensitivity to the economy, wealth creation it's independent -- it's basically housing. It's independent housing at a very high level. And I was wondering what the Canadian and the U.K. competitive position was in terms of new supply and also what you're seeing in the case of new supply in the U.S -- just in that segment, in the senior housing?

Yes. This is Scott again. The new supply in Canada and U.K. is not as well-defined as it is in the U.S. And I see database has been, I think, helpful for everybody to track new supply in the U.S. and that was the basis of our analysis. But we did look at Canada and the U.K. as part of the initial underwriting and then, on a quarterly basis, from an asset management standpoint, to assess new supply and we included both the U.K. and Canada in the numbers that I've provided in the prepared remarks.

And what about the ability of the market to kind of absorb the rent increases or to pay those kinds of rents from just a wealth and a segment standpoint?

Yes. I think that's the real question. So we've been purposeful in acquiring the top-quality buildings in markets that are, at least relative to other areas of those countries, affluent and densely populated. So we're doing our best to take markets and buildings that will stand up better than the others. But clearly, at some level, senior housing is impacted by what's happening in the economy. So we can't predict that, we're just doing the best we can to be well-positioned, to outperform.

Your next question comes from Tayo Okusanya with Jefferies.

Just along that same line of questioning, giving a major exposure now to the U.K., and as well as Canada, are there any of the developed market that you kind of see out there that have those kind of characteristics that you would be interested in?

You're talking internationally?

Yes. It is.

We have studied a few others, but we're not prepared at this point to indicate a certain direction, Tayo.

But are there others out there that seem attractive like when you just kind of take a look at the overall landscape, without mentioning any particular market?

Well, I think we thought the U.K. and Canada were very attractive for a lot of reasons, including similar cultures and backgrounds. So at this point, we're not prepared to suggest other markets, but we do think, over time, that there are some common themes that are arising all over the globe, and that would be that, in fact, there is a movement in many countries toward private pay and for getting the government out of certain activities, given the cost and the burdens on government. But at this point, we're not prepared to talk about any individual countries.

That was our final question. Thank you for joining. This concludes the conference. You may now disconnect.