Welltower Inc. (WELL) Q1 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2014 Health Care REIT Earnings Conference Call. My name is Holly, 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, Holly. Good morning, everyone, and thank you for joining us today for HCN's first quarter 2014 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. Before we begin, let me remind you that 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 attained. 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 Tom DeRosa, the CEO of HCN. Tom?

Thanks, Jeff, and good morning. It's a pleasure to be the speaking with you as the new CEO of HCN. I know many of you from my long career in healthcare and real estate, and I'm looking forward to meeting those of you that I don't know over the coming weeks. HCN had a strong first quarter, delivering outstanding portfolio NOI growth and investing $542 million with both new and existing partners. As you'll hear from Scott Brinker and Scott Estes, our first quarter performance clearly demonstrates that the HCN strategy works. Establish long-term partnerships with the best-in-class healthcare operators, and those partnerships provide access to the best healthcare real estate in the best markets. Before we get into a more detailed discussion of the quarter, I want to mention that we had the opportunity to honor our friend and former CEO, George Chapman, at our annual shareholders meeting last week. We posted some pictures and a video of George speaking at the meeting on the HCN website. And I hope you all take a look. I know that many of you on the line have known George for many years. And I know you will enjoy seeing this emotional, heartfelt tribute as well as hearing George's remarks about succession planning at HCN and my appointment as CEO. During George's tenure, HCN's assets grew from $500 million to $22 billion, and, more importantly, the company delivered an average of 14% annual total shareholder returns. That's an enviable record, and we thank him for his contributions to the company. Also at that meeting, our Chairman, Jeff Donahue, was pleased to announce that all of our proxy proposals passed by wide margins. On behalf of our Board of Directors, I want to express our appreciation for your trust and confidence. Many of you know that I have been associated with HCN for over 20 years, and I'm intimately familiar with the company's management, business and strategic initiatives. I have deep experience with public real estate companies as well as healthcare, both in the U.S. and abroad. One thing you should all know is that the experienced and talented team we have at HCN is just remarkable. Whether it's on our unique campus here in Toledo or at our offices in Minneapolis; Jupiter, Florida; Newport Beach; or London, England, you sense a dynamic, vibrant culture and commitment to excellence as soon as you walk in the door. That, my friends, is our secret sauce. Let me be clear: HCN is not just some financing source chasing deals. We are deeply engaged in the seniors housing and the broader healthcare industries and have a seat at the table with healthcare systems and senior housing operators who are driving efficiencies and improvements in healthcare delivery. What underlies this team is the dynamics of an aging population. You're all aware of this, and it's a global issue. We're spending a lot of time thinking about what aging means and positioning HCN to align with this powerful trend. You'll be hearing more about this from me in the future. As Scott Brinker will describe in greater detail, we are delivering consistent, strong external and internal growth. During the first quarter, we secured a new partnership with Senior Resource Group, yet another leading U.S.-based operator. We also continued to innovate and improve our best-in-class portfolio management systems, like our expense benchmarking tool, which provides our operating partners with information to drive even better results. We have also been the most active player outside of the United States. And, just like in the U.S., we focus on the best markets with the best operators in healthcare property types that we know well. For example, let's take the U.K. HCN has invested over $2 billion into high-end seniors housing, primarily located in the dynamic London Metropolitan area. One year ago, HCN opened an office in London, which is staffed both by local hires and some members of the Toledo team that have transferred there. The point I'm making here is that we are extremely well covered in Europe. A market, by the way, that I know, exceedingly well, having lived in London, and I've been working there over the last 20 years in both real estate and healthcare. I'm also pleased to tell you that we just reached terms this week with a senior U.K. healthcare investment professional to join our London office, someone that I've known for 2 decades and is well known to the HCN management team. We are excited about what he will add to our international efforts. And now Scott Brinker will review our investment activity. Scott?

Thanks, Tom. The year is off to a great start with sector-leading 4.4% same-store NOI growth, and our investment activity was once again the highest in the sector. I'll start with some color on the portfolio, beginning with seniors housing. Results this quarter were way above guidance. Same-store NOI growth in the operating portfolio was exceptional at 8.1%. Rental rates led the way with 4.5% growth. Results were strong across the U.S. and Canada and were especially robust in the U.K. In Metro London, the source of more than half our U.K. income were benefiting from incredible affluence and tight supply. Results in the operating portfolio continue to be exceptional in comparison to every benchmark. Our locations and physical plants are sustainable advantages that will drive continued outperformance. And with occupancy at 89%, there is still plenty of room for upside. If you want to play in a healthcare REIT with the highest organic growth, HCN is the pick. Turning to triple net senior housing, the portfolio continues to generate strong, predictable growth. Same-store NOI grew 3.3%, in line with guidance. Payment covered was unchanged and remains at comfortable levels. Moving to post-acute, results continue to be remarkably consistent. Same-store NOI, once again, increased 3%. Payment coverage after management fee improved to a healthy 1.34x. Many of you will remember touring a Genesis PowerBack facility at last year's Investor Day in New Jersey. HCN and Genesis will open their seventh PowerBack this summer. PowerBack is redefining the standard for rehab therapy. Patients and families love the private rooms, therapy pools, full-time physicians and large therapy gyms. Medicare and commercial payers love that PowerBack delivers tremendous value per dollar spent. This is just one of many examples of HCN partnering with operators to move the industry forward. Medical office. Same-store NOI increased 1.5% last quarter, in line with guidance. This is a low-risk asset class with predictable cash flows. We like the business because of its stability. Equally important, it allows us to build relationships with hospitals and physician groups. Over time, it will be a huge advantage for us to have scale across the continuum. Healthcare is becoming more integrated and more collaborative. The days of silos are numbered. Our relationships across the continuum will put us right in the middle of the collaboration. Investments. As you've come to expect, we're finding accretive deal flow, thanks to the breadth and depth of our relationships. Investment volume last quarter was more than $540 million with a Year 1 cash yield of 6.5%. The activity included follow-on acquisition to a Sunrise and Genesis, a continuation of our longstanding history of growing with our partners. The headline last quarter was a nearly $400 million investment with Senior Resource Group, who's been on our wish list for years. The assets are concentrated in highly affluent Southern California markets. These are among the highest-quality assets in our entire portfolio. And that's a very high bar to exceed. Importantly, SRG becomes another high-quality partner to help grow our business. The ownership group is a joint venture that includes the SRG management team and PSP, the Canadian pension fund who's our partner on the Revera portfolio and the Sunrise management company. Note that our relationships include capital partners, not just operators. The ability to collaborate with partners is increasingly important in healthcare, and HCN excels at it. International. We were the first mover in the U.K. 2 years ago, and we quickly established a leading market position. It's exciting to see that our relationship investment strategy can be translated into overseas markets. To date, we've invested nearly $2 billion in the premium quality U.K. real estate. Our senior team based in London has decades of experience in the U.K. They know every portfolio, operator and market just as we do here in the States. This is -- this allows us to invest strategically, and helps explains why our NOI growth rate exceeds every benchmark. Looking forward, we have active dialogue with 30-plus existing partners. They are the sector's best origination team. The deals are big, small and in between. The common link is high-quality real estate that will appreciate in value over time. Accretive investments have been an important part of our story, and that will continue. Two final points about healthcare real estate: One, it's a fragmented business. Two, it's evolving into a core asset class. The upshot is that, over time, the real estate will flow to large, efficient owners like HCN. With our vast network of relationships, we're going to be at the leading edge of the consolidation. I'll now turn to Scott Estes for our financial results.

Thanks, Scott, and good morning, everyone. I'll center my remarks today around 3 core themes: First, our first quarter financial and operating results were outstanding; second, our balance sheet and credit metrics remain solid, and we retain considerable capital availability at quarter end; and third, we've increased our 2014 guidance to reflect the strength of our first quarter results. So I'll begin by taking a look at our first quarter financial performance. I think the most important thing for you, all, to pay attention to is the rate of earnings growth our platform is generating. Normalized FFO increased to a record $1 per share for the first quarter, while FAD came in at $0.90, representing strong 10% and 11% increases year-over-year, respectively. Results were primarily driven by the same-store cash NOI increase and $3.4 billion of net investments completed over the prior 12 months. G&A for the first quarter came in at slightly under $33 million, in line with our expectations. As a reminder, this quarter included about $3 million of accelerated expensing of stock and options that will not be included in our run rate entering the second quarter. We will pay our 172nd consecutive quarterly cash dividend on May 20 of $0.795 per share or $3.18 annually. That's 43 years of dividends. Our new 2014 dividend payment rate represents a 4% increase over the dividends paid last year and a current dividend yield of 5.1%. Our FFO and FAD payout ratios for 2014, based on the midpoint of our revised guidance ranges, have declined to 78% (sic) [80%] and 88%, respectively. We continue to enhance our supplement this quarter. The most significant change was standardizing the presentation of our portfolio and investment balances at HCN's pro rata share throughout the entire document. In addition, we've provided a new chart on Page 1 that details bed and unit mix by asset type within our seniors housing and care portfolio. And on Page 5, we've added disclosure detailing same-store CapEx as a percentage of NOI within our seniors housing operating portfolio. I would also point out that we've begun adding pictures to the portfolio map on our website starting today, with the 10 SRG assets located in California, Arizona and Oregon and plan on adding a more significant number soon. Turning now to our liquidity picture and balance sheet. In terms of capital and liquidity, it was a fairly quiet quarter for us. We repaid approximately $130 million of secured debt at a blended rate of 5.7%. In addition, we issued a little over 1.1 million common shares under our dividend reinvestment program during the first quarter, generating $64 million in proceeds. We ended March with $562 million of line borrowings, largely as a result of completing $542 million of net investments during the quarter. We are in a solid liquidity position at quarter end based on the following items: As of March 31, we had $1.7 billion of credit line capacity and $186 million in cash. We have $250 million of pending dispositions throughout the remainder of 2014, and we continue to raise over $60 million per quarter through our dividend reinvestment program. Our balance sheet remains in a strong position and know we have limited near-term debt maturities, the HCN's share of debt maturing through year end 2014 at only $218 million. In terms of financial metrics, as of March 31, our net debt to undepreciated book capitalization was 43%. Our net debt to EBITDA stood at 6.2x, while our adjusted interest in fixed charge coverage remains solid at 3.6x and 2.8x respectively. As a result of the secured debt paid off during the first quarter, our secured debt as a percentage of total assets declined to 12.6%. I'll conclude my comments today by providing an update regarding the more significant assumptions driving our 2014 guidance. I'll begin with our same-store cash NOI growth outlook. Given our strong first quarter results, we are increasing our 2014 forecast from the previous range of 3% to 3.5% to a point estimate of 3.5%. The increase is based on the better-than-expected results now anticipated from our seniors housing operating portfolio. More specifically, we're now projecting strong growth of approximately 6% in our seniors housing operating portfolio for the full year. Our 2014 same-store cash NOI forecast for the remaining components of our portfolio remain unchanged. In terms of our investment expectations, there are no acquisitions beyond what we've completed in the first quarter included in our formal guidance. Our guidance does include $163 million of additional development conversions throughout the remainder of the year at a blended projected yield upon conversion of 8.6%. Our forecast continues to include approximately $250 million of dispositions at a blended yield on sale of 9.5%. I'd note that approximately $200 million of these dispositions could occur in the second quarter. There is no change to our annual capital expenditure forecast of $66 million for 2014, comprised of approximately $46 million associated with the seniors housing operating portfolio and the remaining $20 million from the medical facilities portfolio. Our 2014 CapEx as a percentage of NOI for both segments is expected to run in the 7% to 9% range, which we believe is an appropriate level to maintain our premier quality portfolio. In terms of G&A, we're reducing our annual forecast to approximately $125 million from the previous $127 million. We continue to believe that our overall platform is in great position, and we're making a concerted effort to drive down overhead expenses. We're reducing our forecast for the full year primarily as a result of reductions in professional services and consulting costs relative to our initial expectations. I would note that our revised forecast excludes any costs associated with our CEO transition that will impact our second quarter results. Finally, we've increased our normalized FFO and FAD per share guidance for the full year. As a result of our strong first quarter operating results and investment activity, we have increased both normalized FFO and FAD guidance by $0.02 per share. Our normalized FFO guidance was increased by another $0.08 per share to reflect $23 million of additional straight-line rent as a result of the recent Genesis lease modification. Effective April 1, our lease was modified to replace the CPI-based component of the annual increaser with a fixed annual increaser, providing us with a certainty that our full annual cash rent increase will be achieved. So as a result, we are increasing our normalized 2014 FFO guidance by a total of $0.10 to a range of $4.03 to $4.13 per diluted share from the previous range of $3.93 to $4.03, which now represents 6% to 8% growth. We're also increasing our normalized 2014 FAD expectation by $0.02 to a range of $3.55 to $3.65 per diluted share from the previous range of $3.53 to $3.63, now representing a strong increase of 6% to 9%. That does conclude my prepared remarks, but I would finish by saying that we're pleased with our strong start to the year and feel great about our portfolio and financial position at the end of the first quarter. So with that, Tom, I'll turn it back to you for some closing comments.

Thanks, Scott. I'd like to highlight a few points before we take questions. First, our platform is stronger than ever. Our network of partners in the U.S., Canada and the U.K. continues to give us a competitive advantage in the marketplace. I think our Q1 results speak to that. We have a strong pipeline of accretive deals that our team is working on as we speak and expect that to grow throughout the year. We are maintaining a financial position that enables the company to execute on these opportunities, and most importantly, we have the best team in the sector. Our results this quarter are exciting, and we're very pleased to share them with you. But, we remain laser-focused on our mission of delivering superior long-term total shareholder returns. Holly, now we'd like to open up the call for questions.

[Operator Instructions] And your first question is going to come from the line of Michael Carroll with RBC Capital Markets.

Scott, can you give us some more details for the reason of the Genesis lease modification? Was it just a straight-line PPI, I guess, bumps switching to a fixed bump, and what is the fixed bump?

Yes, Scott Brinker speaking. The increaser with Genesis was 3.5% for the first 5 years, and then 3% the final 10 years of the lease. And a portion of that increaser was tied to CPI, and then a portion was fixed, and with inflation seen as low as it has been, this year, there might have been a shortfall in the cash ramp that we actually received, and Genesis was a good partner and agreed to essentially fix the increaser for the remainder of the lease term so that we could ensure ourselves of getting the full cash rent. The result is that, for GAAP purposes, we have to now straight-line all the rent.

Okay, so there is nothing changing I guess in the current run rate. It was just that slight adjustment to the CPI portion of that rate?

Correct.

Okay. And then how you guys are thinking about your current financial position? I know that Scott previously indicated that he is comfortable with a little bit of a higher leverage ratio because of the strong liquidity. Now that you have about $500 million drawn on the line of credit, are you still comfortable with that liquidity position?

We are, Mike. I think, most importantly, we look at the flexibility by having over $2 billion of available capital. But our answers as always were timing of any future capital raise is contingent upon future acquisitions and our investment pipeline.

Okay. And then my last question is for Tom. I know, in your comments, you kind of highlighted the expertise you guys have internationally, mainly in the U.K. Should we read into that, that the company wants to expand more meaningfully in the U.K. and then London?

I think that is a good read on where we're coming from. I think that -- as I mentioned, we've just hired a quite experienced senior guy that we've all known for a long time to join our London office. I think we have great relationships there with the best operators, and we are going to continue to look for good opportunities for accretive investments in the U.K., and we will be looking even outside the U.K. but very carefully and staying with the strategy that we delivered on for many years.

And your next question will come from the line of Tayo Okusanya with Jefferies.

Just going back to the Genesis lease, again, I understand the modification. I'm just curious, it seems like you guys got all the upside from that to the detriment of Genesis. Just wondering on the other side, what are they getting that made them comfortable with basically fixing that piece of the rent bumps?

Yes, Tayo, it's Scott. I mean, this is a long-term fixing your partnership with Genesis. We're doing active investments with acquisitions and new development. So there's no tradeoff other than it's a partnership, and we work together when they need a favor and vice versa. That's the way HCN works.

All right. I appreciate that. And then for the quarter, I believe this was the first quarter where we -- for the senior housing operating platform, the same-store numbers were impacted by the addition of some of the recent transactions that were done, I think, last year. Could you just talk a little bit about what that net impact was on those numbers from the change in the same-store pool?

Let me make sure I understand your question. The same-store pool has increased, and you're asking if the composition changed the growth rate?

Yes, and if it did by, how much?

I see. Well the same-store pool grew 8.1% over the prior year, and the major addition was Sunrise, and their performance was sort of right in line with that overall average. So I would say, on average, it had really no impact.

The only thing I would add to, Tayo, I think is an important point. It's largely a stable pool. So the stabilized result of that same-store pool, there's not a lot of assets until up [ph]. It was within 50 basis points of the 8.1% if you just looked at the stable component.

Great. Okay. Last one from me. I get it. It definitely sounds like acquisition activity you guys are feeling much better about that. Your name, along with some of your bigger peers has kind of been thrown around on some fairly large potential deals in Australia and as well as the U.S., and even in the U.K. You've made some comments about the U.K., just curious about domestically with Griffin-American and Australia with Healthscope, whether those are things you're looking at, and where things may stand on that?

Well, we look at everything. And we have a pretty high bar here. So if there's a large transaction that you're hearing about, assume that we've looked at it, but we're certainly not going to invest in everything that comes across our desk. We're going to invest in the good ones with the operators that we believe we can establish long-term partnerships with. It's not just about a deal for us.

And your next question will come from the line of Juan Sanabria with Bank of America.

I was hoping you guys could just talk a little bit about your relationships with PSP and more broadly with pension funds for PSP. Are there other opportunities to invest alongside some of the investments they have made. And are you having more broader discussions with other sort of long-term capital partners like a PSP, where you could see opportunities to invest in joint ventures, and if you could just speak a little bit to that?

Sure, Juan, this is Scott. PSP became a partner of ours last year through the Revera portfolio in Canada, 47 private [indiscernible] assets. We own, let's see, 75% interest in that portfolio and PSP owns the balance. We're also joint venture partners in the Sunrise management company where we have 24% and they have the balance. And we're now partners with them in this SRG portfolio that we talked about where we each have roughly a 47% interest. That said, the dialogue is active and ongoing. I would think that all 3 of those joint ventures are going to grow, Revera, Sunrise and SRG. And we may look to do other things with them. One thing that became apparent to us over the last 2 years is that getting direct access to these pension funds instead of doing things via private equity companies was maybe a better route for a company like us as a long-term partnership focused company.

Juan, just picking up on what Scott just said, I think that PSP is an example of the value of investing directly with an HCN versus accessing our type of investments through the private equity funds. And I want to make -- I want to mention that this is an area that I have a lot of experience with. In other businesses that I have been involved with, I have relationships with a lot of the large sovereign wealth and pension funds around the world. I will tell you that I've got a lot of calls. They're all interested in talking about healthcare. So I think you should look at PSP as a model for how we will establish financial partnerships with the best quality financial partners in the world.

Just on the G&A front, can you just walk us through what the expectation is for costs related to the change in CEO, and would that include the payments to George to stay on as an adviser and what those are?

Juan, this is Scott Estes. I think -- we don't have any specific comments ready on the number as we're still finalizing some items, but I can say, it will be expensed in the second quarter. And the details will be made available, generally, in the retirement and consulting agreement as well as the employment contracts that will need to be filed with the SEC. So we will have the full detailed results. Those are all a part of it, and we'll provide that in the second quarter.

Great. And just lastly on the financing front, what's assumed -- is there any equity other than what you guys talked about via the distribution reinvestment plan assumed in guidance, and is there anything assumed with regards to putting in place long-term debt, or is it basically the balance sheet as is on a go-forward basis for the guidance that was revised?

Yes, it's per our usual, it's essentially the balance sheet as is at any one point in time.

And your next question will come from the line of Michael Bilerman with Citi.

Manny Korchman on the phone with me as well. Tom, I'm just wondering if you can sort of share a little bit on the board process and the decision on your appointment, and whether that was always a plan from a succession perspective. There's a couple of analogous situations recently in REIT land. You had HCP, which terminated their CEO and put a board member in place. You had Digital, which the CEO effectively was asked to leave, and they put an interim CEO in, who is the current CIO and CFO, and they're going through a search firm and a process. You had Equity One where the CEO announced that he was going to go off and take a new job and the board went through a process and ended up bringing in external candidate. And I'm just curious sort of what the board went through. I've known you for a long time. I understand and clearly you have the background and the history of the company. I'm just trying to understand the process that, that went through.

Well, appreciate the question, Michael. Just understand that we've been talking about succession planning at HCN for a number of years. And while the timing of the announcement might have caught the people by surprise, I just -- you should know that there was not a decision made on a Friday that was announced on a Monday. This had been an open discussion with George, and I think, many of you have heard George publicly talk about succession planning. I think my appointment has a lot to do with the fact that I've known this company for so long, and I know the management team very well. I know the business very well. And I think it's unusual when you have someone who can step into the CEO role who is supported by the retiring CEO of the board and, most importantly, the management team. I think that's a unique situation, so while I can't comment on the other scenarios that you've raised, I think you have to look at what are the unique aspects that allowed this transition to happen so seamlessly here. If you came here, Michael, the day after the announcement -- or actually the afternoon of the announcement, it was business as usual. Everyone was doing what they do best here, and it's all -- I sometimes feel like I've been here forever. It's a strange feeling. But I think what I'm saying is this is very different than you normally find in a -- when a quasi outsider comes in as the CEO.

Right. I guess to that point, you talked about it was ongoing open, I guess this has happened almost 1 month ago. Why don't you have the costs and things nailed down or agreements nailed down? I'm just -- it's just strange not to have that detail to be able to share with us.

The agreements are nailed down. There are some moving pieces that we wouldn't be quoting numbers to you on this call today, but rest assured that everything is nailed down to everyone's satisfaction here. It's just that we're not prepared yet to be putting numbers on a conference call related to that. But when we can, you'll know all the details. But also assume that George's departure was very much in -- along the lines of what his contract was, which is disclosed, and assume that there is additional compensation because he is staying on as an adviser to the company.

It may be worth noting that those contracts will be filed with our 10-Q this evening.

Right. So you'll get -- you're saying he's going to get some amount of severance or other payments, and I guess you're saying that there's some inducement package to you, Tom, that will come, that this could -- I mean, could HCP cost, I don't know, it was like $50 million or $75 million, something that crazy. I mean, what are we looking at in terms of -- just by -- ballpark it for us in terms of cash or stock that will be given here.

Given to George?

Just between both. I assume you're going to be induced with some contract to take the CEO job, and I assume George is owed a certain amount of money, and I think we're just trying to get a perspective of what does the CEO transition cost shareholders.

Mike, it's Scott Estes. I think it's an important issue, philosophically, seeing Tom come in. I think you'll see in the document Tom got a very small stock grant, it was $1 million.

Yes, $1 million stock grant that is totally based on performance in the future.

And his long-term incentive opportunity is essentially that of a high-performing CEO in the sector. George's package and the only variability why we don't share a number is, effectively, he is an employee technically until June 30 and a few of the performance measures need to be determined at the time. So there's still some work to be done. But in essence, it's largely contractual plus the long-term incentives and plans that have been in place that are part of the calculation. So it's nowhere outlandish in terms of a number.

Michael, you'll see that my compensation structure is very ISS-friendly.

Now are you going to step off the other public company boards to free up your time to be full-time CEO?

At the moment, no. If those responsibilities became overbearing, both companies know that I may have to. But at the moment, I think it is an advantage to this company and to -- that I sit on the boards of those companies. Those are very -- the businesses are relative to what we do, both of them are real estate companies today. And I think there are numerous synergies that -- and knowledge that I learn from sitting on the boards of those companies that are relevant to HCN and vice versa.

Okay. And just last one from me. Would George have a non-compete after he has a certain advisory relationship with the company?

The arrangement does include a noncompetition arrangement, yes. That's all detailed in the agreements to be filed.

To be filed?

Yes.

And how long does that last for, just out of curiosity?

It's a 3-year consulting arrangement, but each party has some rights to terminate along the way.

And your next question will come from the line of Ross Nussbaum with UBS.

It's Ross here with Nick. I've got 2 questions. The first is back on Genesis. Maybe I'm just not understanding it, but Genesis is a big boy. You're a big boy. You entered into a lease, just because inflation is lower than, perhaps, some expected, I guess, I'm missing why they'd feel so generous as to say "Hey, we're just going to pay you some more rent out of the goodness of our heart without expecting," and I think, Scott, you used the word some favor in return. It would seem to me, that that's an awfully generous thing to do all else being equal.

Yes, Ross, it's not that really unusual. There's a catch-up provision in the lease. So they would have repaid us at some point. It's just a matter of when do we get the cash rent, and we prefer to get it now rather than later. So, I mean there's really nothing to this other than Genesis and HCN are partners in this portfolio, and we're growing the business together. There's no -- there's nothing else to read into this.

Got it. No, but that catch-up point is an important one because I don't think that was stated before, so that now actually makes sense. Okay, second question I have for you is on the disclosure front with respect to the senior housing RIDEA portfolio. Can you guys break out of the 4.5% rate growth that I think you cited in the same-store pool, how much was the renewal rate growth and how much was the rate growth on new leases?

I'm not sure offhand, Ross...

Okay. And this I guess speaks to sort of the question I was going for, which is, if we think about the multifamily REITs, and you guys own a portfolio that's bigger than many of the multifamily REITs, those guys do provide renewal rents, new lease rents, they provide all of their metrics by state, and I would just sort of think about trying to provide a little more color around those kinds of topics going forward because I think it's something that investors are going to want to focus on.

Okay. We'll do it.

This is Nick Yulico here. Just a question on acquisition pricing. It seems like it's now getting a lot more aggressive out there in the market, whether it's big diversified portfolios in the U.S. or even in the U.K., seems like a lot. A lot of people are trying to be buying in the U.K. right now, and so what I'm wondering is how do you think about -- what's your minimal acceptable initial yield that you would do deals at that you think would be accretive for you guys today?

Well, Nick, we don't make investments unless we think we're going to make money at it. And we prefer to make money on Day 1 and over time. I'd say the SRG portfolio is sort of the low bar, and that's the highest-quality portfolio we've seen -- our private pay, the markets are exceptional and that was a 6% Year 1 yield. That's moderately accretive. Not in a major way, but at our cost of capital today, we make money today. More important, over time, it's really strong growth rate in that portfolio. So we think that, over the long term, that's the type of investment that will make our shareholders a lot of money.

Well, I guess what I'm wondering is 6% is sort of as the low end of cap rates for higher-quality operating senior housing. Does it make any sense to pay fixed cap rate for anything else, so even below a fixed cap rate for medical office, for U.K. going overseas and taking more currency and other risk? I mean, should we think about this as the pricing of senior housing operating in the U.S. that you've done over the past couple of years is -- that's still is going to be lowest cap rate that you guys are going to pay for this -- any kind of real estate?

I mean, Nick, it's hard to predict the future. It's interesting though, what we see is that senior housing medical office has been an extremely strong performer over the past decade. It's been outperformer in up cycles and down cycles, and it's finally attracting the interest from institutional investors that it should. So we've seen the cap rate spread for healthcare versus other asset classes compressed, but there's a still a big gap. And I think there's still room for that gap to narrow. So 6% seems low. We can make money at 6%, but it's still substantially higher than the cap rates that people are paying for other asset classes that to us have lower growth expectations and less resiliency from year-to-year.

Right. I guess, just for the final question. I guess my point was, I think we've all sort of understood that senior housing, we've got our hands around it, senior housing operating cap rates could be 6%, but does it really make sense to pay below 6% for medical office? It seems like a lot of the incremental sort of -- do you think about maybe a larger portfolio, that there were people trying to push pricing, they're pushing it on skilled nursing, they're pushing it on medical office, and they're trying to drive down cap rates with that? So that's what I'm wondering -- is why -- what's so attractive about those other asset class? Are they at all similar to the senior housing? Or should we think about senior housing as just this isolated lower cap rate investment within healthcare?

Nick, I think they're all potentially attractive asset classes for us. And I wouldn't just focus on the initial yield. I mean that's important, but there's a lot more to it from our perspective, including the growth rate over time, most importantly, but also the relationship, and is it one that's going to grow? Or is it a static one-off investment? SRG is an example. It's a best-in-class portfolio, but we're also going to grow with SRG. They're an active developer. They're actually into turnarounds, so they're going to grow that business, and we're going to be their capital partner. So that impacts our thinking, too, when we talk about what's an acceptable initial yield on an investment.

Nick, we don't feel the need to throw around money at low cap rates just to demonstrate that we can do a deal. That's not the way we do business. And that money -- there's a lot of that money out there, let him go do it. We're looking -- if you're to see us go into opportunities that are -- that you may determine are a lower cap rate, assume that there is, as Scott said, it's part of perhaps an initial relationship. There's an opportunity to really grow with that operator or healthcare system, if it weren't in a, for instance, in a medical office situation. If it were an initial opportunity to get in with one of the largest health systems in the country and we saw an opportunity to do more with that health system, that might be a reason to do that 6% deal.

Your next question will come from the line of Jeff Theiler with Green Street Advisors.

On your senior housing operating portfolio, I think you mentioned that you saw particularly strong performance in London. Can you put some numbers around -- just kind of what the NOI growth rates were for the U.S. versus Canada versus the U.K. and whether you see any difference in longer-term NOI growth rates for those different geographies.

Jeff, it's Scott. The U.K. was right around 10%. U.S. was right around 8%, and then Canada was more like 5%. And I would say the longer-term difference, especially in Canada, is that our portfolio has very low acuity. It's like senior apartments, so a lot less care services being provided. So if you were going to rank them by long-term NOI growth, I'd probably put Canada at the lower end of that range and the U.S. and U.K. at the high end. The tradeoff with Canada is that it's a very, very stable stream of income. I mean, it really functions more like an apartment building with very long lease terms. I mean, there's very little turnover. So we look at this as a diversified portfolio, and it's a combination of resiliency and strong growth. But does that answer your question?

Yes, that does. And then lastly, one of your peers just made a significant investment in entrance-fee CCRCs. I know you've had some experience with those assets in the past. Do you share their view that this is a good time in the cycle to get into that product? And is this something that you might consider increasing your investment exposure to over time?

Yes, Jeff, it's Scott. We do have a small portfolio of CCRCs. I think it's about 1% of our portfolio. They're performing fine. Brookdale is a great operator, so that's a positive for the investment. I don't know what kind of yield they got on it. But traditionally, entry-fee CCRCs would command a much higher cap rate. So that would impact my response, and I just don't know what the purchase price was. So it's hard to say much beyond that.

But this doesn't -- you haven't thought of this as a particularly good time to get into that product, is that fair to say?

Yes, I wouldn't say that we're looking to substantially grow that asset class, Jeff.

[Operator Instructions] And your next question will come from the line of Jack Meehan with Barclays.

I want to start with the RIDEA performance. Obviously, really good in the quarter. I guess my question is, maybe around the weather, do you see any sort of downward pressure from that? Was it on the occupancy line or operating expense. And did you try and parse that what that could be?

Yes, Jack, it's Scott again. We took a best guess. We do have a large portfolio in New England that was heavily impacted by the harsh winter. And just looking at utilities alone, they dragged down our NOI growth for the whole portfolio by over 100 basis points. So it did have an impact. Had the weather been normal, I think our NOI growth rate would have been closer to 10% rather than 8%. But there's always something that's happening. It's a hurricane or it's the flu or it's winter weather, so we try not to get to into that.

Yes, difficult to predict the weather. And on the moving side, I guess, one of the things we've been thinking about is, is it possible that, somebody was planning a move-in in the first quarter, maybe it gets pushed into the second quarter. Did you see any change in move-ins maybe in the New England market, and then has that changed as you go into April and now into May?

Well, occupancy was surprisingly strong in first quarter. It was ahead of our expectations. And the traditional seasonality in the business is that occupancy increases from the first to the second, and then also the third quarter. So I would expect, our centers to continue increasing. But we didn't necessarily hear people saying that the weather caused occupancy to be challenged in the first quarter.

Okay, good to hear. And the last one, obviously there's been a lot of talk around international market, both one in where you're already at, and then Australia, which I think is a little bit new. I was wondering, maybe if you could just walk through some of the criteria you think about when you're trying to pick new markets that you would enter?

Well, the most important thing for us other than the risk-adjusted return is whether we can pick the right partners and buy the best real estate. I mean, that's how we've established a competitive advantage in the U.S. And that means, being deeply connected into the healthcare markets. And that's why when we approach the U.K., we hired what we think are the 2 best investment professionals that are tightly networked into the senior housing operators, the medical office developers and operators, and the best health systems. They can help us pick the best partners and the best assets. So that -- that's really the starting point for us, is knowing the market.

And your next question will come from the line of Rob Mains with Stifel. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: Since the door is open for me there, I'm going to ask a weather question as well. Some of the other healthcare REITs with medical office building investments have talked about some reimbursements that might come back to them in the second quarter from the utility storm or [ph] that sort of thing. Is there anything that -- like that that's going to affect MOB performance in the current quarter?

Yes, Rob, it's Scott speaking. Our MOB NOI growth rate last quarter was 1.5%. And we true-up the operating expenses at the end of each quarter. So there's no catch-up concept. But similar to my comment about the weather impacting the senior housing performance, we think, likewise, it impacted the medical office portfolio by about 50 basis points. So again, we would have done a little bit better had the weather been more normal. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, fair enough. And then when we look at the SRG investment. Since that's primarily independent living, is that going to reduce consolidated RevPAR in -- going forward?

It might by a bit. It's about 55%, 60% independent, and the rest is assisted, Rob, but the markets that these asset are in are so affluent that it's still a very high number despite being mostly independent living. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: And then my last question, staying on the independent living theme, you're not developing anything in independent living, and I know that the [indiscernible] data suggests that that's the one asset class where clearly there's a favorable demand/supply relationship. Just curious about your thoughts about IL as a development opportunity.

Yes, we're not doing anything directly, Rob, but indirectly, we're doing still a fair amount of new construction in IL. Merrill Gardens is an example. They're actively building 3, 4, 5 new projects a year, and we've got the right to buy those if and when they seek to sell, which they certainly will when they stabilize. So we're doing a lot of that type of thing, Rob, with development even if we're not funding it directly. A lot of that stuff will end up within our portfolio.

And your next question is a follow-up question from Michael Bilerman.

It's actually Manny Korchman here. When you look at sort of the press reports that were out end of last year, beginning of this year, there was reports out there that you and Ventas were in discussions to potentially merge the companies. Was that a part of sort of the succession process, or was that something else and sort of -- did that have any influence on the fact that now the CEO has transitioned to a new person?

I can't comment on those rumors about conversations between Ventas and Health Care REIT. I would say that has nothing to do with a process that has been under discussion here for many years. This is something that -- these were discussions between -- as I told you between George Chapman, the management team and the board, regarding what was the right way to put a good succession planning program in place because George was going to retire. At a certain point, and as I said earlier, I think the stars lined up pretty well here. It's very different than what you find with some of the other situations that are out there. So, there's always people speculating -- in an industry like we're in where there's so much runway for growth and you're delivering every quarter for your shareholders, why would we even consider that at this point, any kind of a combination. That makes no sense to me.

So M&A was not one of the options that the board explored?

Absolutely not.

And at this time, I'll turn the conference back over to Tom DeRosa for some closing comments.

Well, I thank you, for all your participation today. I hope we answered all your questions. And I hope you're as excited about HCN as we are, and I look forward to getting a chance now that I could get on the road now that we've released earnings, I look forward to the chance to get to see all of you over the next couple of weeks. All the best. Thanks.

Thanks.

And at this time, we would like to thank you for your participation in today's first quarter 2014 Health Care REIT Earnings Conference Call. You may now disconnect.