Welltower Inc. (WELL) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the fourth 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 fourth 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, Jeff, and good morning. During the last five years, we have grown our platform by $20 billion of high quality investments, while at the same time disposing of $2 billion of non-core assets. And from our standpoint both are critical to growing a sector leading quality portfolio. And we also believe that these investment results have confirmed our strong leadership position in the healthcare REIT sector. As I reflect on what we accomplished last year and the opportunities in the senior housing and healthcare sector moving into 2014 and beyond, a few important themes emerge. First, our team and our operators continue to execute very effectively. Our 2013 investment volume of $5.7 billion including an additional $400 million of gross investments in the fourth quarter, attest to the fact that we build relationships and structure deals that create value. Our operating partners continue to deliver on their growth plans and our property management groups delivers best-in-class service while keeping our outpatient care facilities at industry-leading occupancies with solid rent growth. And as our announcement last week of the Sunrise recap demonstrates our excellent working relationships with our current partners, has allowed us to transition to a long-term capital arrangement with a outstanding Revera team, another trusted partner. As most of you know, Revera is wholly owned by PSP, the second largest pension fund in Canada. And based on the strength of this arrangement, Sunrise is and will continue to be one of the foremost international senior housing operators. Briefly on the capital side. Our U.K. debt offering and other capital markets activities in 2013 underscore our disciplined management, both of our balance sheet and enterprise risk, and we are executing effectively on all fronts. Second, expect us to exploit market opportunities in order to improve both the stability and growth of our earnings. There is a tendency by many industry observers to view trends in static terms. That is to say, trends are analyzed without considering the fact that we and other market participants will both shape and respond creatively to these trends. We view trends in dynamic terms, so we will always be active in addressing both the opportunities and the challenges many of you have identified. Let me give you an example of what I mean. We are a first mover in the vibrant and growing U.K. and Canadian markets because we saw markets that needed capital and were in transition. Our move into these markets was an extension of our relationship partner approach, and has diversified and enhanced our growth. It has also proven to be a significant advantage for us in terms of winning new opportunities going forward. Third, we continue to redefine the healthcare REIT space and accelerate its acceptance as a core property class. I should add that with the addition of Tim Naughton to our board, we look forward to exchanging ideas and processes from the multifamily and senior housing sectors to the benefit of each. Our team is doing a great work with regard to data collection and analysis. That will continue to increase the depth and breadth of the information we provide to the investor community. Our operators are seeing this capability in numerous ways, including, state-of-the-art benchmarking work we are doing with respect to operating metrics. We will also be rolling out our new website later this month which will have some features that we think the investor community will embrace. And of course, we maintain our active leadership role in a wide range of industry association initiatives. We are indeed immersed in this sector. You will continue to hear us discuss the resiliency and growth of our platform. The two are not mutually exclusive. Our portfolio architecture is designed for both which believe is a differentiator for a healthcare REIT. We all know that the dominant demographic reality of the industrialized world is the aging population. Furthermore, every care provider will increasingly need to participate in the integrated care delivery model. With our immersion in healthcare, we are uniquely and positively positioned to ride that wave. I will now turn the call over to Scott Brinker, who will give you additional perspective on the resiliency and growth of our platform over the past quarter and for the year.

Yes, thank you, George. I am happy to share our outstanding fourth quarter and full year performance and our positive outlook for 2014. I will start with senior's housing, which represents 60% of our income. Performance in the operating portfolio continues to exceed expectations. Same store NOI grew 6.2% over the comparable quarter and by 7.4% for the full year. Our best in class Sunrise portfolio is performing in line with our high expectations. Last week, we announced an expansion of our deep relationship with Revera and its owner, PSP, a triple A rated Canadian pension fund. Revera will soon acquire a 76% interest in the Sunrise Management Company, replacing KKR and Beecken Petty. The change in ownership is an outgrowth of our discussions with PSP and Revera over the past year on numerous potential projects. They share our partnership-based approach to business, our long-term investment horizon, and our commitment to improving seniors housing. Two of the premier senior living platforms will now be united under a single umbrella though Sunrise and Revera will remain independent companies with separate management teams, brands and headquarters. HCN will own the remaining 24% interest and we are essentially rolling over our existing stake. Turning to triple-net senior housing. The portfolio continues to churn out steady growth. Same store NOI grew 2.9% over the comparable quarter and by 2.8% for the full year. Senior housing fundamentals remain favorable. Demand has been growing faster than supply and is expected to continue doing so in 2014. Looking forward, there are questions about the impact of new supply. Last quarter we talked about the percentage of our NOI that’s impacted by new construction. This quarter I would like to share with you the actual performance of our buildings that were impacted by new supply over the past few years. Despite the new competition, the impacted buildings still produced 5% annual NOI growth over the 2-year before and after measurement period. 5% growth is only slightly below the growth rate in the rest of our portfolio during that time period and is, of course, still very strong. More globally, demand for senior housing benefits from unstoppable forces, such as the growth in the senior population, increased product awareness, and a decline in family caregiver ratio. The short and long-term outlook is attractive. So let's talk about how we are positioned to capitalize. We have a nice mix of short and long duration leases, modern buildings, and we are concentrated in growing, densely populated markets. These characteristics position HCN to deliver superior internal growth. We have been more selective about picking our operating partners. They are shaping the future of the industry for the better. They have embraced our executive forum, where we discuss best practices around topics such as resident and worker safety, electronic medical records and tracking resident outcomes. All of these efforts help advance the industry. We are using our scale to do group purchasing that results in savings in food, supplies, CapEx and insurance. Moving to skilled nursing. Our portfolio is in good shape. We are very comfortable with the quality of our buildings and operators, thanks our investment and disposition activity. Earnings growth is strong and consistent. Same store NOI increased 3% for both the comparable quarter and the full year. Payment coverage after management fee is stable at 1.33 times. Genesis now accounts for more than 80% of our skilled portfolio. We expect roughly 1.3 times fixed charge and facility level payment coverage this year as Genesis continues to validate our view that it's a premier post-acute operator. I will wrap up the portfolio review with medical office, which represents 15% of our income and is delivering steady growth. Same store NOI increase 1.3% over the comparable quarter and by 2.2% for the full year. Looking forward, the ongoing wave of hospital and physician consolidation is a huge positive for our business. Our tenants are becoming bigger and stronger. We also benefit from the relentless shift to outpatient care. We own modern buildings that were purposely constructed to deliver outpatient services. As a result, our buildings are critical to our tenants' ability to capture market share in the local markets. Let's turn to investments. Last quarter we invested $410 million with an initial cash yield of 7.1%. The activity was headlined by $99 million of acquisitions with Benchmark, our fourth largest operating partner and a leading provider in New England. We also invested $126 million in the six medical office buildings. The average age was just four years and all six are affiliated with leading health systems. We also had $112 million of dispositions. The yield on sale was 7.8%, an attractive sale price given these were old, non-core assets. More important, we are nearly at the finish line at the $2 billion plus non-core disposition program that we initiated a few years ago. We have emerged with a premier quality portfolio that should produce excellent internal growth going forward. After investing $20 billion over the past four years, we are getting questions about a slow down. From our shoes, we see continued opportunity. We are one of the largest owners in this sector, yet our market share is in the low single-digits. Second, healthcare real estate is quickly becoming a core asset class, which will accelerate the movement of real estate to institutional owners like HCN. Third, we have a platform to invest across multiple countries. Add to that our deep relationship with the providers who are at the leading edge of consolidation and the acquisition potential is tremendous. So as we move into 2014, expect us to be active in the U.S., U.K. and Canada. As always, we will complement our acquisitions with new development. Our existing partners are doing more than $1 billion of new development each year. A portion of those projects will be funded by HCN and we will be the takeout on many of the others. We also continue to develop more than $100 million of preleased medical office buildings each year. Our investment team has been very busy the past few years and we don’t expect that to change in 2014. I will now turn the call to Scott Estes to discuss our financial results and guidance.

Thanks, Scott, and good morning everyone. I will conclude our prepared remarks by focusing my comments on three specific topics today. First, our efforts to provide greater portfolio transparency through enhanced disclosure. Second, the strength of our financial picture and liquidity as a result of our fourth quarter capital transactions. And third, our record fourth quarter earnings results and 2014 guidance, which demonstrates the strength of our internal and external growth vehicle. So I will begin with a brief update regarding our latest efforts to enhance our disclosure. As George mentioned, we continue to look for opportunities to improve transparency. On February 24, we will launch our new website. We believe it will provide a more logical, user-friendly interface providing quick and efficient access to key portfolio information. The most significant enhancement will be an interactive property map that will provide a better understanding of our specific locations by property type throughout the U.S., Canada and the U.K. In addition, everyone has wanted our individual property level addresses for a long time and we are excited that our new site will provide that. Turning now to our financial picture. In terms of capital and liquidity, we continue to enjoy excellent access to the capital markets and raised approximately $1.3 billion during the quarter through two separate unsecured debt offerings. In early October, we raised $400 million of long 10-year notes, priced to yield 4.6%. And in early November, we completed our highly successful, inaugural U.K. unsecured debt offering by issuing £550 million of 15-year notes, priced to yield 4.875%. Based on exchange rates at the time, this translated into $887 million U.S. dollars. These offering fit nicely into our maturity schedule and have extended our average unsecured debt maturity to 9 years at a blended rate of 4.4%. In addition, we issued a little over 1 million common shares under our dividend reinvestment program during the fourth quarter, generating $62 million in proceeds. With over $2.1 billion of credit line capacity and $158 million in cash at year-end, we are in a very comfortable liquidity position entering the New Year. Moving to the balance sheet. We used the proceeds from our unsecured debt transactions to pay down over $1.1 billion of line borrowings and other debt during the fourth quarter. Specifically, we reduced our line balance from $848 million to $130 million, paid off $300 million of 6% senior notes maturing in November, and repaid $95 million of secured debt at a blended rate of 4.9%. As a result, our balance sheet remains in a strong position and note that we have limited near-term debt maturities in 2014 with only $330 million of secured debt maturing this year. In terms of financial metrics. As of December 31, net debt to undepreciated book capitalization was 42.6%. Our net debt to EBITDA stood at 6.1 times, while our adjusted interest and fixed charge coverage remains solid at 3.4 times and 2.7 times respectively. In addition, secured debt represented only 13% of total assets. These metrics are all generally in line with our strategic targets. I will conclude my comments today with an overview of our fourth quarter earnings results and update on our dividend payments and the key assumptions driving our 2014 guidance. Normalized FFO increased to a record $0.99 per share for the fourth quarter while FAD came in at $0.86, both representing a strong 16% increase year-over-year. Our FFO and FAD payout ratios for the fourth quarter declined to 77% and 89%, respectively. Results were driven by the same store cash NOI increase of 3.1%, the $5.2 billion of net investments completed during 2013, and the fact that last year's quarter was negatively impacted by the capital raised in advance of our Sunrise investments that closed in early 2013. Importantly, for the full year , normalized FFO and FAD per share increased to solid 8% to $3.81 and $3.36, respectively. We will pay our 171st consecutive quarterly cash dividend on February 20 of $0.795 per share or $3.18 annually. This represents a 3.9% increase over the dividends paid last year and represents a current dividend yield of 5.6%. Turning last to guidance. In terms of same store cash NOI growth, we are forecasting growth of 3% to 3.5% in 2014. This is based on the combination of higher growth expected out of our operating portfolio and the more stable growth predicted for our longer-term net lease portfolio. To break down this forecast by asset type. For our seniors housing operating portfolio, we are projecting growth of 5% or better as we remain confident in the operating environment and our operators performance. I note that this forecast includes the entire Sunrise investment beginning with the first quarter and the Revera investment beginning in the third quarter of the year. I'd also point out that since we have only five properties in fill-up in our same store pool, our stable portfolio is also projected to grow same store NOI by a solid 5% in 2014. For our seniors housing triple-net portfolio, we are looking for 3% to 3.5% growth. For our post-acute skilled nursing portfolio, an increase of 3%. For our MOBs an increase of 1.5% to 2%. And last for our two smallest portfolios, we expect our hospital assets to generate a 2% to 2.5% increase, while for life science we expect the result to be slightly negative due to 205,000 square feet of space expiring in 2014. But remind everyone, this represents only 1% of projected NOI. In terms of our investment expectations, we do not include additional acquisitions in our formal guidance. However, as Scott mentioned, you should expect us to generate continued investment opportunities from our existing partners. We also intend to develop selectively to further enhance the quality of our portfolio. Our 2014 guidance includes $235 million of development conversions at a blended projected yield of 8.6%. Our forecast also includes approximately $250 million of dispositions at a blended yield on sale of 9.5%. Our capital expenditure forecast is $66 million for 2014, comprised of approximately $46 million associated with the seniors housing operating portfolio, with the remaining $20 million coming from our medical facilities portfolio. Our G&A forecast is approximately $127 million for 2014. We feel great about our platform and have been focused on the balance between appropriately growing our infrastructure while maintaining our focus on operational efficiency. We've seen some nice improvement in this area. Of note, during 2013 our total G&A declined to 46 basis points of average assets, down 7 basis points versus the prior year and in line with the average of the ten largest REITs in the industry. For the first quarter of 2014, we anticipate G&A of approximately $33 million to $34 million which includes about $3 million of accelerated expensing of stock-based compensation. At this point, we believe the vast majority of our staffing needs have been met. We have right sized the platform to accommodate our recent investment activity and we are well positioned for future growth. Finally, we expect to report 2014 FFO in a range of $3.93 to $4.03 per diluted share, representing 3% to 6% growth over normalized 2013 results. Our 2014 FAD expectation is in the range of $3.53 to $3.63 per diluted share, representing a 5% to 8% increase. These estimates are driven primarily by acquisitions completed over the last 12 months and another year of strong internal growth expected from our existing portfolio. That concludes my prepared remarks. So I'd like to leave everyone with our collective sense of confidence in our portfolio and financial position, and the flexibility provided by more than $2 billion of liquidity entering 2014. At this point, operator, we'd like to open the call for questions.

(Operator Instructions) Your first question comes from Nicholas Yulico with UBS.

Turning to the senior housing operating segment. Can you help us understand how to think about that portfolio, how it did in 2013 going in, versus what you're saying for the same store guidance in 2014 since the pool is changing? I guess, first, how many assets are going to be in that pool for 2014?

Nick, this is Scott Brinker. By the end of the year, all 327 plus or minus, will be in the same store pool. Most of them come in in the first quarter. That includes Sunrise, Brookdale and a number of Belmont Village communities. And then in the third quarter we'll bring in the 47 Revera communities.

Okay. And as we think about -- because in 2013 it was only about, I think, a third of your entire senior housing assets were in the same store pool which put up over 7% NOI growth. I mean, was the NOI growth much different for the other assets which are now entering the pool this year?

No. There isn't a material difference in the portfolio quality or the growth characteristics of last year's same store pool versus what will be in the same store pool this year. So, we're still confident about the growth prospects for that portfolio. The guidance is 5%, hopefully we'll beat it.

Okay. And then turning to that 5% guidance. Could we get the breakdown of that as far as the same store revenue growth versus the expense growth for this year?

Sure, Nick. It's still Scott speaking. Revenue growth is roughly 4% in the budget and that's consistent with what we achieved in 2013 and then operating expenses are expected to increase in the 3% to 3.5% range, which again is consistent with what we've experienced recently.

Okay, great. And just one last question is, if I look at the fourth quarter same store numbers for the senior housing operating segment, you did 4.3% year-over-year revenue growth in the fourth quarter. Occupancy was roughly flat which implies I guess your rate growth was somewhere in that 4.5% range, which seems pretty high relative to the industry. Is there something I am missing there or is that -- are you guys actually getting over 4% rate growth?

Yes. That's exactly what happened, Nick. We've been tracking that for the last three or four years. And the average rate growth in our portfolio has been in the 4% range per year. That compares to the NIC averages in the 1.5% to 2% range. So we think it's a couple of things. One is the quality of the buildings and locations, and most importantly is probably the quality of the operating partners. Because senior housing is unique and that it's very much dependent upon the quality of the real estate, but even more so on the quality of the operating partner and we've been very careful about which operating partners we've put into that operating or RIDEA portfolio.

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Well, it's a little bit of both. But we try not to get too specific about whether it's occupancy or rate because you may trade some of that off one against the other over the course of the year. So, we're relatively indifferent between the two. Ultimately, we're trying to grow NOI over the long-term and provide great value to the customers so that they're willing to pay the rate.

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

So I've just got kind of a question for the long term, and it sounds, obviously, you're very confident about how things are looking for the senior housing business today. But what gives you the confidence that there won't be a return to, call it circa 2000, 2001 in terms of supply. What kind of dynamics in the marketplace do you think will preclude an event like that happening another time around, or do you think it will happen eventually?

Let me start, Rich, it's Chapman. A couple of things strike me. One, in the earlier period, a major part of the problem frankly related to Wall Street supporting a number of companies. And in order to make the numbers work, frankly, operators that became public were pushed to frankly overdevelop. And I think that's changed considerably. The other thing that happened earlier when senior housing was sort of new, was that folks did not focus enough on just how important the service component was and the care component was. So it's not for everybody, and that should mean that a lot of developers stay out. I think, finally, as you're looking down the road quite a bit, the actual demand component in five years, probably more like ten as you look at the average age today, goes up as well. So I think there is a lot to protect us from that same kind of a problem. I don't know if any of my colleagues want to add anything.

Okay. And then, in terms of the transaction recapitalization of Sunrise. What would you say to the argument that smart money, namely KKR, is bowing out of the business of managing senior housing assets and that we shouldn't be kind of looking at that as a red flag that there's something negative on the horizon? Thoughts on that thesis?

Rich, I'll start again and let Scott Brinker take over. But each of KKR and Beecken Petty, and Dan Decker have been in senior housing for quite a while. And KKR specifically, as you mentioned, is a major investor in another senior housing company and is looking for more. So, I think it is more just the timing that is so important here of when we reposition the company from shorter term horizon lenders to a longer term perspective that is represented by Health Care REIT and Revera backed by PSP.

Yeah, Rich, it's Scott. I'd also add that there is a long list of private equity and pension funds that are pouring money into the space right now and aggressively chasing acquisitions and new development. So, this is, in our minds, one of the few PE firms exiting an investment as opposed to looking for more. And from everything we know, KKR, they are happy about their investment in Sunrise and are actively looking to do other things in the sector. They have a pretty big investment with a private REIT called Sentio and are actively looking to do other things. So this is not an exit from the business by any means.

Okay. Fair enough. And then last question. In past years, you would always lead off your guidance with some assumption about acquisitions, and you haven't done that in the past few years and yet you sound like you will continue to be very active. I'm curious, what was the reason for taking back that means by which you provided guidance? Is it just you want to be more conservative, or is there something out there different that makes it a little bit tougher for you to target a number?

Rich, it's Scott Estes. I don't think there is anything too much to read into here. I think we've been pretty consistent with how we talk about our base line of investment expectations as a result of our strong operator relationships. And we, again, to remain consistent have chosen not to include the number in our guidance, but I think everyone knows we've been pretty consistent with sourcing a nice base line level of incremental investments.

Thank you. Your next question comes from Emmanuel Korchman with Citi.

Scott, maybe if we can just stay on that same point for a second. If we look at the relationship deals that you guys typically do, how much sort of foresight do you have on those deals and what volumes might close even if you are not sharing that number with us?

So I can take this, Scott Brinker. Mannie, it's always hard to predict the exact timing, I think that's the biggest issue. It is very much a partnership approach. So we're ready to buy when they're ready to sell, and we think that some of that will happen in 2014, some of it will happen in 2015 and maybe some after that. So we have an identifiable pipeline of acquisitions. I think that's unique. Our existing partners by our count, own or control more than $20 billion of real estate that we don't own yet, that at some point I think we could. But whether that happens over one, two or five years is very difficult to predict.

Great. Maybe we can talk about deal cost for a second. They seem to be pretty high quarter in and quarter out whether or not you guys close sort of high volumes of deals or lower ones, obviously higher in the quarters where you do close a lot of deals. Should we be reading into those at all? Are those deals that just didn't close and maybe will? Or do you run other costs through that line that we should sort of be aware of?

Mannie, you're referring to the transaction cost line...

Yes.

And it's been, I would say, running a little bit higher than normal. And an in short, we would expect that to generally run probably 1% to 1.5% of investment volumes. And the main reason it's been running a little bit higher through 2013 was the nature of the transactions we completed, the larger size. Such as the Sunrise transaction, acquiring a public company where you have fees and severance and legal and other associated costs. So, there's nothing really to read into that. We would generally expect it to trend more towards the 1% to 1.5% range of investments going forward.

And then Scott, just to wrap up. How do you think about your investment spreads? Like where do you think, given the cap rates that you disclosed in the release, where do you see your weighted average cost of capital and how do you guys think about that internally?

That seems to change quickly. But if you look at just the trailing reasonable period of time, it seems to be in the low-6s as today's cost of capital. And then importantly, we know that equity shareholders are looking for growth in the dividend, so we try to find investments that are going to provide that 3% plus, hopefully 4% and 5%, annual growth rate to the equity shareholders. So, low-6s and targeting IRRs in the high single-digits.

Thank you. Your next question comes from Josh Raskin with Barclays.

I am here with Jack as well. And I appreciate the coming new disclosures, looking forward to that next week. But just maybe staying on that capital issue, I think you have about 43% debt-to-cap. Even with some of these divestitures, I think it comes down but still above 40%. So now in terms of equity raises, would you guys be amenable to raising equity in this environment or would you only do that if there was a significant transaction that would require an equity raise?

I don't feel like we need to raise any money anytime soon. You did point out the dispositions that are in our guidance. We have our full line available. So in essence that's $2.25 billion plus $250 million of dispositions. We also receive a rate of about $240 million a year through our dividend reinvestment program, which is a nice help. So, in short, we do remain committed to getting our debt to undepreciated book cap down towards the 40% range over the long-term. But there's no pressing needs to do anything, it really is contingent as always upon our pace of new investment.

Okay. That’s fair, Scott.

Hi, this is Jack everybody. Maybe for Scott Brinker. You mentioned you are expecting consistent coverage at 1.3 times for post-acute this year. What are some of the underlying expectations for Genesis in terms of admissions, length of stay and rates for 2014?

Yes, in 2013, census was a bit down. That was true across the sector. Genesis had very nice rate growth and controlled expenses well and I would expect really a continuation of that trend in 2014. So we're not expecting massive increases in occupancy and low single-digit increases in Medicaid and Medicare rates, and expense growth in the 3% to 3.5% range.

Got you. Okay. So it sounds like continued progress admissions, length of stay pressure and then the rate should be relatively consistent. Does that sound about right?

Yes. I think that's right. Our increases are just below 3.5% each year and the roughly growing NOI at the same rate. So that ultimately leads to the flat payment coverage.

Got you. Okay. And then looking at the RIDEA portfolio, is there anything else that you are seeing in terms of occupancy in the quarter? I liked some of the comments around supply. I guess I was just expecting a little bit more sequential improvement given the NIC data trends in that. Again, we're using average occupancy and we've had an upward slope throughout the year.

Yes. Nothing to read into it. We're reporting our fourth quarter results here. That tends to be a pretty slow quarter for senior housing, just because of the weather in particular. So this isn't unusual at all. In our minds, we see occupancy to be a little bit down and hopefully it starts to pick up in the second and third quarter in particular.

We had a pretty solid growth in the comparable quarter last year. I think it was up 8.6%. So, I think that played a little bit into it, but 6.2% is still a pretty strong number.

Thank you. Your next question come from Jeff Theiler with Green Street Advisors.

What was the valuation of the Sunrise operating company on the recent sale and how did that compare to the valuation during the acquisition?

Yeah, Jeff, from our standpoint, we're really just rolling over our investment, and PSP as a private company has asked not to talk about purchase price. That's not something that they have to do, unlike us. So we are honoring their commitment.

Fair enough. So, Scott Brinker, you mentioned the 5% NOI growth in the senior housing properties that were directly affected by new supply. Were there any redevelopment costs or excess capital that went into those properties to help generate that or is that really just an apples-to-apples number?

It's pretty apples-to-apples. I mean, there are situations where you want to invest in front of new competition coming into the marketplace and we are doing some of that. But it's not like we hoard hundreds of millions of dollars into these assets so that they could compete with the new supply.

Okay. Along those lines. It looks like your CapEx guidance for the senior housing operating portfolio in '14 is about $1,300 a unit, which is about what you spent this year. I'm just trying to square that with $2,000 plus a unit CapEx requirements I hear from private operators. Was there a lot of capital put in at the time of purchase or what should I be thinking about as a run rate going forward?

Jeff, it's Scott Estes. I think the number, I don't know how you're calculating it, and it's a little tricky using unit counts based on our ownership interest. We're calculating about $1,700 per unit and that's been fairly consistent. But your point about the average age of the facilities and the money that has already gone into them, I think keeps that number a little bit lower and fairly consistent by our calculations, about the $1,700 per unit range.

Okay. So, you think you're at a good run rate now going forward?

Yes.

Okay. Last question, you have $21 million or so of senior housing rental income expiring in 2014. Is that tied into your disposition guidance, or how should we be thinking about that?

Yeah, Jeff, it's Scott Brinker. That's a portfolio in the mid-Atlantic that is super high quality. We did a shorter-term lease on that acquisition a couple of years ago, so that's the reason that it's expiring. We fully expect that operator to either renew at the current rent plus an increase there, or if they surprised us and didn't renew, we would have plenty of people that would love to take over that portfolio.

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

I was just wondering if you talk a little bit about your life sciences....

Would you speak up a bit?

Can you hear me okay now? I was just wondering if you could talk a little bit about your life sciences portfolio. I know it's small, but it is looking like it's maybe underperforming a little bit. And kind of what you're thinking long term you're going to do with those assets?

Juan, it's Scott Brinker. It is a small part of our portfolio, less than 1%. I would characterize the NOI decline as volatility more than a problem. We just have some big spaces that are maturing in 2014. We haven't yet found the right tenant. This campus is literally surrounded by MIT. So there isn't any question in our mind that over time and I mean the relatively short to intermediate term, the portfolio is going to be fine and the space will lease up. It's really a matter of getting the right tenant into these spaces. So you may see some volatility for the next year plus or minus, but long term there is no question about the value of this real estate.

And any plans to keep or grow that portfolio or dispose of it?

Let me respond to that. We had hoped to grow that part of our portfolio because it was directly linked to health systems, especially academic health systems, and to date we have not had much luck in doing that. So, we'd like to either grow it or at some point it might be available for sale. So we continue to evaluate that as we've said in some previous calls.

Okay. Great. I think in your intro remarks you talked about your partners doing, I think it was about $1 billion of developments. Can you just talk about, if you are funding any portion of that or what portion of that you may have purchase options on upon completion?

Yeah, Juan, it's Scott Brinker again. On an annual basis we have been funding in the neighborhood of $100 million to $200 million of new construction on balance sheet and I think you will continue to see us in that range for the senior housing and post-acute. So the balance would be funded by our operating partners. On the vast majority of it we have some level of right to the acquisition when and if the operator looks to monetize. In general, they are raising private equity for these types of projects. And the whole concept is, build it, stabilize it and then look to get out. So it's been a nice way for us to acquire assets over the last several years and we would expect that to continue to be a nice pipeline of really high quality projects with existing partners going forward.

The equity component there is not necessarily people that have been involved in seniors housing. I'm just thinking about your previous point that in the early '90s it was sort of people developing that weren't focused on the care component. Are you worried at all, anecdotally we hear some feedback that people who haven't been involved are increasingly looking to play on the space given how stable it was during the last downturn, that that kind of maybe creeping back in at all.

The folks that we're talking about who were doing PE work there or doing mezz or other types of financing for construction, are doing that at the behest of our very strong operators and then it is flipped to us. So it is the operator really making the call on when to proceed with development and where. So, we don't think it is at all comparable to, at least within our portfolio, to what happened previously. Assuredly, there will be some folks, some people that come in to develop because, frankly, senior housing has become a core property type. But we don't see it at the same extent as the previous time.

Okay. And just last question. You kind of have a slide kind of guiding people towards some of the building blocks to construction NAV. I was wondering if you could share your thoughts on what your net asset value may be, and kind of your thoughts around where you feel comfortable issuing equity relative to that.

You know it depends on quality of the assets, of course with cap rates. But when we do our own assessment, it's in the high 50s, low 60s. If you were to break up the portfolio into pieces, we think that's what you would net to the shareholders at the end of the day. Now, when you account for the fact that it's a $30 billion portfolio with all of the relationships and the pipeline of future growth, I would expect there to be a pretty substantial premium to that price.

And in terms of raising capital, we're obviously seeing investment opportunities, looking to invest accretively. So, I think that to the extent that we're potentially trading at maybe a slight premium to NAV, we'd obviously consider that, but as a part of a larger picture.

Thank you. Your next question comes from Tayo Okusanya with Jefferies.

Just a couple of questions along Juan's line of questioning and the life science portfolio. George, the comments you made about building that portfolio. I mean, are assets like the F&H [ph] Fan Pier acquisition, is that the kind of asset you would be interested in? And are there opportunities to kind of get your hands on those type of assets in Boston to build out your presence in that market?

We would certainly look at Boston. I'm not going to really comment on another REIT's purchase. It's just, it doesn't work. But certainly what we wanted to see develop over time was a drive into urban areas with direct linkages to some of the better academic health systems in the country. And to date, in part because of pricing, we've not been able to achieve that.

Okay. Got it. That’s helpful. And then just again, conversation on pricing. You take a look at the cap rates on some of your acquisitions this quarter, I'm just kind of trying to get a sense of, was there something unique about these deals? Or is that really where kind of market is at this point and things just seem to be getting tougher and tougher with more private equity players in the space?

It's a little unique. I think it was a bit higher than you might have seen had we acquired all those through auctions. The lion's share of it was driven off-market by existing relationships. So a blended yield in the mid-6s for the quality of assets that we brought in senior housing and MOB. I think you'd be challenged to reproduce that kind of a yield if you were buying things through auctions.

Okay. And all these assets have pretty high occupancy at this point or is there lease up opportunity in any of these assets?

Not so much lease up opportunity. Benchmark is taking over management at two of the properties and they tend to have a little bit different revenue model, that I think they could see some substantial NOI growth there over time. But it's not really driven by occupancy as much as it is by rate and service.

Okay. That’s helpful. And in the quarter you did take about a $2 million provision against your loan. Is that a general provision or is that a loan specific provision?

It was a specific provision related to a small loan for our property that we've had in our portfolio for a very, very long time that was a potential development candidate and we've been carrying a lot of cost taxes on it, and we sold it in January for $500,000. So we wrote it down to $500,000 at year-end. That's the only actual loan on non-accrual as of year-end and then sold it in January.

Okay. That’s helpful. And then just one more from me. Thanks for your patience. A lot of conversations recently about the doc fix, some concerns about post-acute care, may have to cough up some funds to help with funding that. Just kind of curious what you are hearing at this point from some of the operators around this issue.

Yes, we don't have any more insight than you do, other than we're taking a pretty conservative view of what reimbursement rates look like for the foreseeable future.

When you say conservative, are you thinking flat or are you thinking down?

Flat to slightly up. It may be down in any given year but we don't invest with one-year time horizons. So, if you look at this over a three, five and ten-year horizon, I think it's pretty reasonable to expect slightly positive rate increases.

Thank you. Your next question comes from Ross Nussbaum with UBS.

I might have missed this, but in the fourth quarter it looks like you registered $15.7 million of transaction costs. And that struck me as a large number against $278 million of acquisitions because it would be 5.6% of that acquisition number. How did you rack up transaction costs that high?

There are three components to it, Ross. First, there was some Sunrise related fees and just timing of some tax and other advisory services. As you mentioned, we did have a handful of other deals in the quarter. And then the third part, there was actually a termination fee related to just a restructuring of a lease. And when we revalue a lease when it was stayed with the same operator, you can't mark up the value of the asset through a lease restructuring. So you have to run the increase in value through transaction costs. So there is nothing more than those three items in it this quarter.

So of the $15.7 million, how much do you think was really transaction cost? Is it sort of standard 1% of your acquisition?

We actually did that analysis. Just seeing how the transaction costs have been running, I think about 2.3% for the year. And by our characterization, what would be common usual items or factors related to really the bigger deals that I mentioned in my previous remarks such as the Sunrise transaction, we think it was running right at 1.1%. So that's kind of the flavor from my comments. So I think it should run between 1% and 1.5% going forward.

Okay. If I switch over to the MOB portfolio, I didn't see a disclosure of re-leasing spreads in the supplemental. Can you give us a sense of what the re-leasing spreads on new and renewable leases have been running?

Yes, overall rate growth for the portfolio last year I think was 2%, plus or minus, for the whole portfolio. It's unique we have such a little rollover. Less than 30% of our square footage expires over the next five years, so there just isn't much to worry about. And we have been able to keep the retention rate really high which helps us renew tenants without putting a bunch of money into the buildings and we're getting long leases on those renewals. So the activity viewed in the aggregate has been very positive. Occupancy remains strong. NOI per unit or per square foot is still at the very top end of the industry. So Mike Noto and his team are doing a great job. We've got great buildings. We think that portfolio continues to produce that steady, solid, low single-digit NOI growth.

So just to understand. The 2% number you threw out, that's a cash re-leasing spread of the new cash rent versus the expiring cash rent?

That's the rate growth for the entire portfolio year-over-year, which is sort of the [indiscernible]

So including contractual bumps?

Correct.

Okay. I think it would be helpful going forward if in the supplemental you could add some disclosure on what new and renewal leasing spreads are on a cash basis, because most of the office REITs that's a pretty standard disclosure, and I think it's tough for us to get our arms around the true performance of that portfolio. We see the occupancy number but it would be helpful to understand on the leases that are expiring, what's really going on there.

Got it.

Thank you. Your next question comes from Jim Sullivan with Cowen Group.

First question I think is for you, Scott. In the supplement you have your NAV NOI reconciliation page, and on a sequential quarter basis that number actually went down. But it appears you may have changed how you calculated that. Was there a change in the calculation method from Q3 to Q4?

There was. We intentionally moved it to just show Health Care REIT share of NOI.

So in terms of the adjustment, the interest income piece wasn't changed?

I'm not sure what you are talking about there. Charles, you want to help him?

Were you were referring to, Jim, the interest income?

Yes, the interest income. I know that you have -- this reconciliation is keyed back I guess to page 16 in the sup, where you have the other assets and loans receivable kind of move down into the other asset from the NOI section. I just wondered if there was any change in that, but I thought you were doing it in both cases on HCN's proportionate share.

That's right. And we did move the value of the loans down below. So you can see that, the real estate loans receivable line is new as opposed to showing the interest.

Okay. Second question, in terms of the operating senior housing piece. Can you just remind us what percentage of the operating costs are labor cost related?

Yes, it depends on the property type. For independent living it tends to be 40% to 50% of total operating expenses. And then for assisted living, it would be more in the 60% to 65% range.

And to what extent, given what we're hearing about minimal wage pressure in certain states as well as at the other end of the per employee cost, kind of standard of care questions and recommendations that standard of care be increased given the acuity level of the patients? To what extent are your operators feeling upward pressure in terms of personnel cost?

Nothing to date. I mean the operators in our portfolio have staffing levels that are at or well above any industry standards or requirements. So, that's not really a concern. And wage growth, it's been pretty manageable for the last several years, and at least in our history the wage growth tends to move with the ability to move rental rates as well. So there hasn't been tremendous pricing power for the past several years and consistent with that the wage growth has been pretty controllable.

And, finally, in terms of the expense ratios there. We hear in some other property types, certainly over the past year, significant increases in real estate taxes and insurance, and real estate tax is obviously a function in part of revenue growth and what's been happening with cap rates. And to what extent has that been a kind of a major factor in the expense growth that we've seen year-over-year or to what extent do you expect it to become maybe more of a factor going forward?

Yes, it hasn't been too far outside the other expenses but it is growing more quickly than, say the staffing costs. So on average it's been well above 3% for sure. That tends to be property specific. So one building maybe 2% and another maybe 10% plus. So, that is an area that is maybe subject to a bit of excess growth right now.

And so overall on balance, you may have indicated this before, but what level of expense growth on a same store basis are you anticipating in 2014?

Yes, Jim, 3% to 3.5% is our estimate.

Okay. And then finally from me, just a follow-up question to the earlier questions on life science. I think you stated in the prepared comments that you're attributing the decline in same store NOI to, I guess, a lease expiration next year. And I think but I wasn't sure, that you indicated that was one operator and I think you identified the amount of square feet. First of all, is that accurate, number one? And number two; is the tenant that's not renewing either Vertex or Ariad?

As it relates to the same store NOI, a slight negative decline. We're talking about very small numbers here. It was about $200,000. And in total, it was $100,000 increase in ground rent at one building and then there's just some timing of revenue and expense recognition. So overall, we hadn't made this point in our comments. Our life science portfolio is actually generating a current cash yield of 8.4%. So, again, 1% of NOI, doing very well, creating a very nice yield. So, Scott, you want to take his other question?

Yes. Vertex is one of the tenants that is vacating in 2014.

And is there any issue with exposure to Ariad in terms of -- and do you know if they are planning to renew the space they currently leased from you?

They are a tenant on our campus. They lease roughly 125,000 square feet and they take one entire building. Mostly the lease matures in 2019. And our expectation had been that they would be moving to their new campus at Kendall Square. But I think that situation there is dynamic and I'm not sure if they will stay or they will go. Our expectation had been that they would be leaving and we would find a new tenant over the next couple of years.

Okay. And then finally in terms of the space that's being vacated next year. You had talked about your confidence in the quality of the real estate and the demand in the market. Can you give us some indication as to where you think the market rent is versus the rent currently in place?

Yes. We're in the mid to high-50s, and the market for new construction is in the high-60s. So, given the quality of the real estate in the locations, again we're confident that over time we're going to find the right tenant for that space.

Thank you. Your next question comes from Todd Stender with Wells Fargo.

Just for the Sunrise recap. Is Health Care REIT funding any of Revera's new equity stake?

Are we funding their equity stakes?

Yes.

No.

Are you providing any loans? No.

Well, we'll see. PSP owns Revera. They've got a $75 billion balance sheet. But how they finance the acquisition, they are still working through that. We'll probably close in the next 90 to 120 days.

Okay. Thanks. And George, I would imagine you brought the buyer and seller together in the Sunrise recap, unless I'm reading too much into that. Just wanted to expand on your thoughts on the deep relationships across all your operators really culminating and pulling this recap off.

I think that our team has great relationships. And we thought this would be a great partnership with Revera and PSP and we plan to do, hopefully, more business with PSP in particular. I think they're going to be a great partner, even perhaps internationally over time. So, yes, I think that our relationship approach helps. And our whole team helped to bring the, perhaps the most appropriate partner to the table for this transaction. Clearly, we view that as a company strength.

Thanks. And Scott Estes, you provided same store guidance for MOBs of 1.5% to 2%. Just as a reminder, what percentage of the portfolio is multitenant and if you could break that growth rate out, just for that piece as well?

I don't know that off the top of my head, do you Scott? I don't have that number right with me, Todd. I'll just have to get back to you on that one.

Thank you. Your next question comes from Rob Mains with Stifel.

Just three kind of mop up questions here. First of all, I noticed that you're doing more expansions reported this quarter than last. Should we read anything into that other than it's just opportunistic or is this kind of a strategic direction.

Just opportunistic, Rob.

Okay. And then, am I clear on this that the switch from KKR et all to Revera, since Sunrise will remain a different company you don't see this affecting the operations of the Sunrise portfolio in any way?

Correct.

Okay. And then last question. Scott Brinker, you said that you're nearing the end of the asset recycling. The guidance includes $0.25 billion of dispositions. Is that recycled or are some of those purchase option exercises?

I think it's recycling. There's one -- about 80% of it is in hospital area, Rob. So we really have smaller seniors housing component to the disposition guidance at this point. I think there is, again, one hospital towards the middle to the back half of the year in the budget right now, as for as dispositions.

So we should view this more as kind of an opportunity as the prior dispositions have been to kind of upgrade the portfolio rather than something getting taken away that you'd rather not lose?

Absolutely. Yes.

Thank you. Your next question comes from Michael Mueller with J.P. Morgan.

Just one quick question. On page 4 of the supplemental, looking at the tripe-net coverages. It looks like about 10% of the NOI, I guess tied to the senior housing triple-net assets, is covering at about 1 or less, 1 time or less. I was wondering, can you just give us a little bit of color on what's behind that and where you see it trending over the next few years?

Yes, Mike, this is Scott. We try to also provide a little context on that same page, because there is more to the story than just payment coverage. We've tried to give people a sense of what level of corporate guarantee is there, security deposits, letters of credit, all those types of things, that also help pay the rent. And, importantly, there are some portfolios in that table that are still in the sort of turnaround or lease-up phase. So, over time we of course expect to have zero, below 1.0 coverage. But there will always be a portion that underperforms, and that's why we ask for corporate guarantees and ask for letters of credit etcetera, so that we make sure we get the rent payment.

(Operator Instructions) Your next question comes from Karin Ford with KeyBanc Capital Markets.

Two quick ones. First on the Sunrise recapitalization, were there any changes to your management contracts with Sunrise in the deal?

Only very modest changes. The management fee will go down but not in any material way.

Okay. And then second question is, given your comments about where you think NAV is and where the stock's trading, should we expect you guys to likely tap the ATM in 2014?

We could. I think in general we'd look to be more nimble. We have, I believe, over $450 million of availability on our ATM. We'd been obviously working larger transactions so it didn't make as much sense to -- we have had some very large less frequent transactions. But it's nice to have that tool in the toolkit as we think about deploying capital effectively.

Thank you. Your next question comes from Emmanuel Korchman with Citi.

Thanks for taking the follow-up. Just thinking about the transaction cost for one more second. How much of those costs are full onetime write-offs or write deal costs and how much are more sort of, maybe G&A-sque, where they are deal related but sort of more run rate?

Again to get into a lot of the details, I would say $3 million really are the deal related costs this quarter, truly about a 1% number. You had some Sunrise cost, just the timing of when those hit. They hit a little bit later in terms of some of the tax and advisory services. And then probably about half the number was the termination fee that I mentioned as a part of the lease restructuring. That was a specific onetime item.

So they will actually be closer to that 1% looking forward on volume?

Yes.

Thank you. At this time there are no further questions. This does conclude the conference. You may now disconnect.