Welltower Inc. (WELL) Q2 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Second Quarter 2015 Health Care REIT Earnings Conference Call. My name is Holly, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I’d like to turn the call over to Jeff Miller, Executive Vice President and Chief Operating Officer. Please go ahead, sir.

Thank you, Holly. Good morning, everyone, and thank you for joining us today for HCN’s second quarter 2015 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, HCN 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, CEO of Health Care REIT. Tom?

Thank you, Jeff, and good morning. One of the things I guess me and the team here excited to come to work every day is that HCN is part of a solution to a big problem. Today, healthcare delivery is faced with a mandate to drive down costs and deliver better outcomes. Sounds like a great idea, right? As they say, easier said than done, this mandate cannot be met unless we can drive patients from acute care hospitals into lower acuity settings. You may have seen Mount Sinai hospital’s ad in last week’s New York Times that stated, if our beds are filled, it means we fail. What does that mean? It means that one of the top hospital systems in the world recognizes that their old business model is not sustainable. If they, like many hospitals, continue to low acuity uninsured and cognitively impaired elderly patients, their historic business models simply won’t work. Better real-estate solutions are needed. In many of the metro markets of the U.S., the UK and Canada where our company is concentrated, we simply do not have adequate post-acute and outpatient care for the broader population and senior care communities to keep our ageing population well and avoid unnecessary hospital stays. HCN has established itself as the preeminent capital partner to drive the most effective healthcare real-estate solutions and I’m proud to announce to you this morning, that one of the largest and certainly most respected real-estate investors in the world has chosen HCN as its partner to establish its initial investment position in healthcare real-estate. The Canada Pension Plan Investment Board commonly known as CPP, has entered into a joint venture partnership with HCN to acquire a superb portfolio, a medical office building largely located in the famous Golden Triangle of Beverly Hills, California, one of the most priced locations in the world to hold any category of real-estate. While nearly all of our new investment volume this outstanding opportunity was sourced not from a broker-led auction, but from an existing relationship that was looking for liquidity and saw the benefits of taking HCN shares. CPP’s decision to co-invest in this portfolio underscores the high institutional investment grade quality of the real-estate and further validates the unique investment proposition that HCN offers to our shareholders. We are excited to welcome CPP to the HCN family. Scott Brinker and Scott Estes will take you through more of the details of our Q2 asset and financial performance, but I’m pleased to say that our results have exceeded your expectations. Given the hangover of issues posed by weather and flu from Q1, 5.2% same-store NOI growth from our U.S. senior housing portfolio at 3.2% same-store cash NOI growth from the entire portfolio was noteworthy. I am also pleased to report FFO per share of $1.09 for the quarter versus $1.06 for the same quarter last year. Keep in mind that we have pre-funded our capital needs for the nearly 3 billion in new investments made in the first half of this year as well as continuing to drive down leverage. These efforts awarded us positive outlooks by Moody’s and S&P this past quarter. Hence, while providing you with outstanding growth and new investment opportunities, we have not taken you out on the risk spectrum and will not compromise capital structure, asset quality, market or asset class in order to chase yield or manufacture short-term earnings growth. This is a core value of HCN and a clear differentiator. We stick to our partnership model and work hard to maintain the value proposition that the top senior care and post-acute operators and health systems derive from HCN. It’s what you are shareholders and partners can count on. Now, Scott Brinker will provide you with a closer look at our operating performance and new investments made during the quarter. Scott? Scott Brinker – Executive Vice President and Chief Investment Officer Thank you, Tom. I’m pleased to report accelerating internal growth with same store earnings up 3.2%. The operating portfolio in the U.S. led the way with outstanding 5.2% same-store growth in the second consecutive quarter. Our footprint is pain off. For years, we target large metros that have superior growth and population, jobs and housing values. Today we have 8% market share in the top 10 MSAs, that compares to less than 4% share in all other markets, clear evidence of our concentration in large markets. The big metros are more transparent, more liquid and deliver better results. Our same-store growth in large markets continues to be substantially higher than our smaller markets. Modern physical plans and premium operating partners further differentiates us. Shifting to the operating portfolio in the UK, until this year it’s been a tremendous growth -- with double-digit same store growth. The severe flu season this year caused the big spike in move outs and a decline in earnings. Census is moving back up and we expect strong results in the UK to resume within a few quarters. Same store earnings in the overall operating portfolio with 3.3%. Rental rates were up 3.2% and occupancy increased 10 basis points. Move-ins continues to be strong and move-outs have normalized, setting a stage for census to move higher. To that point, occupancy is up 60 basis points since our earlier May earnings call. Triple net senior living continued its excellent performance. Same-store earnings were up 3.4%. The superior growth was driven by active asset management. In particular, the Merrill Gardens properties that we converted to a lease with large escalators and the CCRCs that we converted from entry fee to rental. Moving to development, we’ve opened 22 properties in the past two years. They are 700 basis points ahead of underwriting on occupancy and 7 million ahead on NOI. Meanwhile, new supply in our local markets measured as a percentage of existing inventory is less than half the number provided by NSG[ph]. We’re also seeing and hearing about 10 plus percent increases in development costs since beginning of the year. This should help put a governor on new supply. Turning to post-acute long term care, our rental income is growing consistently. Same store earnings were up 3.1%, payment coverage was flat and remains at secure levels. Next up is outpatient medical where again the takeaway is steady, predictable growth. Same store earnings increased 2.6%. We’re seeing minimal new supply and growing demand for outpatient services. Digging deeper, our asset benchmarks favorably on key indicators like occupancy, age, hospital affiliation, lease roll over and NOI per flip[ph]. These assets are poised to deliver steady earnings growth for years to come. Turning to transactions, we continue to pass on or be outbid on nearly every auction. The vast majority of our 600 plus million of investments was privately negotiated by follow-on activity within our existing partners. That list included Brandywine, Avery, Senior Star, Legend, Cascade, Mainstreet and Genesis, the blended initial yield is 6.7%, which is a healthy spread to our cost of our capital. And we funded much of it through the sale of our Life Science portfolio at a 5% yield on sale. Our stable of operating partners is a massive competitive advantage and that gap is growing. The leading operators want to be part of our team. In the first quarter, we added Aspen and Oakmont and in the second quarter, we added EPAC[ph], who develops and operates Class A senior living properties in New England. We added three other new development projects, all located in high barrier-to-entry markets in Boston, one of our core markets. We also agree to acquire a publicly traded senior living company called Regal. The properties are heavily concentrated in our core Canadian markets, Toronto, Montreal, Ottawa, Vancouver. Revera, an existing JV partner will co-invest 25%. HCN will receive a 6.1% unlevered preferred return that grows by 4% each year until year six. This is another signature HCN investment, existing partner, strong alignment, major metro locations and an accretive return. The headline investment last quarter was an outpatient medical portfolio that we acquired from an existing relationship. The assets are concentrated in the Golden Triangle in Beverly Hills, one of the world’s most coveted real-estate markets. Beverly Hills has a moratorium on medical space, which creates a major supplies range. Rental rates in these buildings have increased by 6% per year over the past decade. As the owner of half the medical space in the city, we stand the benefit for years to come. We should [indiscernible] these units to the seller at $78 per share for much of the consideration, that’s a double digit premium to our current share price. The key strategic element here is that we established a partnership with CPP. They join PSP on our team of pension fund partners. Their capital in-flows are large and steady through all market cycles. When the capital markets are choppy, these partnerships will be a huge differentiator. Our CFO Scott Estes will now discuss the financial results.

Thanks, Scott and good morning everyone. You just heard Tom and Scott talk about our recent investment success, in an environment where there is greater uncertainty about our cost of capital due to recent pressures on our stock price and the future direction of interest rates. So from a financial perspective, how do we think about balancing your desire for us to be more prudent in the current environment, with the hope that we continue to invest accretively to grow our portfolio and future earnings? And the answer is, that you should expect us to do the following; to emphasize investing with our existing partners and off market transactions, to maintain the strength of our balance sheet and to maximize our financial flexibility by accrete funding investments and leveraging additional sources of capital such as JV partnerships and dispositions when appropriate. We successfully adhere to these principles so I’d like to lead you with three specific takeaways this quarter. First, we preemptively raised the capital needed to fund the investments completed year-to-date. Second, we’ve done so while further strengthening our balance sheet and credit metrics, resulting a nice momentum with the rating agencies and third, we moderated our pace of investments and retained significant liquidity which will allow us to selectively capitalize on acquisition opportunities moving into the second half of the year. I’ll begin with my detailed remarks with some perspective on our second quarter financial performance and enhancements to our disclosure. Normalized FFO came in at $1.09 and normalized FAD with $0.95 for the second quarter, representing sequential increases of $0.05 and $0.03 respectively. These are solid sequential improvements in the light of raising 3.1 billion of capital year-to-date through a combination of equity, debt and disposition proceeds, which were used to fund the 2.9 billion in growth investments completed during the first half of the year. I think our most important financial message this quarter ties directly to something Tom talked about in his earlier remarks that is, we will not sacrifice the balance sheet in an effort to drive short term earnings growth. More specifically, our net debt to book capitalization has now declined nearly 5 full percentage points over the last five quarters to the current 38%. In terms of dividends, we will pay our 177th consecutive quarterly cash dividend on August 20th of $0.825 per share, an annual rate of $3.30. This represents a 3.8% increases over the dividends paid last year and a current dividend yield of 4.7%. In terms of our supplemental package, we made a few noticeable enhancements this quarter in response to investor and analyst feedback. First, on page 13, we’ve added back disclosure in our unstable portfolio around the time of projected future development fundings and growth investment balances. On page 14, you can see that we have provided our pro rata share of beds, units and square footage data to allow you to more accurately calculate those numbers on an NOI basis. And last on page of 22 and 24, we have added our Canadian portfolio performance to both the [indiscernible] and NOI reconciliations. Turning to our liquidity picture and balance sheet, the significant highlight of our second quarter capital markets activity was the largest, single tranche U.S. debt offering in the company’s history. In late May, we completed the sale of 750 million of 10 year senior unsecured notes, priced to yield just over 4%. In addition, we issued 1 million common shares under our dividend reinvestment program, generating 70 million in proceeds. We generated 596 million of proceeds due to sale of our Life Science portfolio interest and loan pay-offs, which included 190 million of gains and represented a blended yield of our total proceeds of 5.3%. We completed several debt pay-offs during the quarter, the most significant of which was the discharge of our 300 million of 6.2% senior unsecured notes which was scheduled to mature in June of 2016. And finally, we repaid approximately 99 million of secured debt at a blended rate of 4.5% and soon to refinance 166 million of secured debt at a blended 2.4% rate. As a result of these activities, there were two important outcomes for HCN; first, the blended costs of debt on our senior notes declined a 4.3%, while our average senior note maturity was extended to 9.3 years. And even more importantly, we ended the quarter with over 2.6 billion of liquidity, including 2.15 billion available on our line of credits, an additional 218 million in cash and an anticipated cash proceed of approximately 216 million from dispositions forecast throughout the remainder of the year. Our balance sheet and financial metrics at quarter end remain in great shape. As of June 30th, our net debt to underappreciated book capitalization with 38.1% which as I mentioned previously has declined 5% over the last five quarters alone. Our net debt to adjusted EBITDA declined slightly to 5.46 times, while our adjusted interest and fixed charge coverage for the quarter improved nicely to 4.15 times and 2.37 times respectively. Our secured debt levels declined 10 basis points to only 11.2% of total assets to quarter end. It’s important to us that the continuously improving strength of our balance sheet was recognized by the rating agencies during the quarter as well, as both Moody’s and S&P recently improved our ratings outlook positive from stable. I’ll conclude my comments today with a brief update on guidance and our key assumptions. In terms of same-store cash NOI growth, we continue to forecast blended same store growth of 3% to 3.5% for the total portfolio in 2015. Our forecasts are generally changed for the respective portfolio components but as Scott mentioned, we are forecasting more moderate pace of growth at our senior housing operating portfolio until the performance accelerates in the UK. In terms of our investment expectations, in addition to investments completed through the second quarter, our guidance include the Regal lifestyle communities and Genesis investments detailed in our earnings release expected to close late in the year, plus approximately 160 million of investments to our Mainstreet partnership and 170 million of development funding. Our 2015 guidance also includes 63 million of development conversions at a blended projected yield of 9% and we continue to expect to receive disposition proceeds of approximately 1 billion for the full year and an expected yield of total proceeds of approximately 7%. Our capital expenditure forecast is now approximately 50 million for 2015, comprised of 30 million associated with the seniors housing operating portfolio with the remaining 20 million coming from our medical facility portfolio. These amounts continue to represent only 6% to 7% of NOI in both asset categories. Our G&A forecast is now approximately 147 million for 2015, which is generally in line with our previous estimates. And finally in terms of earnings guidance, we are in a position to maintain our 2015 estimates today despite raising 750 million of new capital in the quarter and accelerating the disposition of our Life Science portfolio and trends considerably earlier than previously planned. So as a result, we continue to forecast normalized FFO in a range of $4.25 to $4.35 per diluted share, representing 3% to 5% growth. Our normalized FAD 2015 expectation remains in the range of $3.83 to $3.93 per diluted share, representing a solid increase of 5% to 7%. In conclusion, we are pleased to preemptively funded the investments completed year-to-date, to have significantly strengthened our balance sheet and maximize our financial flexibility by retaining a significant liquidity position entering the second half of the year. So that concludes my remarks. I think operator at this point, we’d like to open the call up for questions please. Thanks.

[Operator Instructions]. Your first question will come from the line of Paul Morgan with Canaccord.

Hi. Good morning.

Good morning.

Just in terms of the famous guidance – you held the guidance – and if I read right, it sounded like the UK operating portfolio isn’t set to accelerate, starts playing at the second half of the year, if I read your comments correctly. So where are you seeing offsetting upside in the portfolio that’s kind of keeping you in the range?

I’m Scott Brinker, I’ll start. The U.S. continues to be really strong, so five plus percent growth in the first two quarters and that’s roughly three quarters of the operating portfolios so that’s by far the most significant driver. And I would say that UK actually is improving, census is definitely moving back up, it’s just that we need to climb out of a pretty big hole, because of the flu from the first quarter that extended into April. So, we’re going into the right direction each quarter moving forward is going to improve. It already is, it’s just will take a while with that growth rate to turn positive, but I would say 2016 is the latest based on current trends. I’ll say for our U.S. same store growth is quite encouraging and I think again speaks to some of the concerns about supply coming into the markets, we maintain that in the markets where our portfolio is concentrated there is not a supply issue. And I think that now five plus percent same store sales growth in the U.S. portfolio which obviously is the overwhelming majority of our asset portfolio I think should help to direct some of those concerns.

The same is true in UK, two thirds of our operating income comes from the greater market, which I think is the most favorable supply demand market of any in our entire portfolio. We own very modern assets so there is no question that he will be happy we own these assets over time, they just had a really bad flu season.

Okay, great. My follow up just on Regal may be, could you offer any color in terms of how you see the growth upside in that relative to the rest of your Canadian asset?

It’s Scott Brinker, I’ll take that. First, we’re doing within our existing partner in Revera, it’s the second biggest senior living provider in Canada, so there should be some economies of scale. On the expense side, Regal is a relatively small company with plus or minus 25 homes. So we are expecting some upside there. And the way we structured the deal is that, while we will maintain our pro rata shares of all the upside, we will have a fixed 4% increase in NOI through this preferred return for the first five years and that starts at a 6.1% yield. So it’s a very attractive initial yield plus growth at a minimum and then we do capture the upside as well. I also think that Regal portfolio is in the top markets in Canada. Again, you have to -- we are creating critical mass in the major metro areas in the Canadian market, I think that’s something that we feel very good about for the long term growth prospects for this portfolio, based on those markets.

Great. Thanks.

Your next question will come from the line of Rich Anderson with Mizuho Securities.

Hi, Rich.

Good morning. So, on the MOB deal with CPC, how would you characterize those assets being in Beverly Hills, are they kind of like cosmetic type surgery, just thinking of the demographic there in Beverly Hills?

Well, good question, Rich. As you might imagine, lots of plastic surgeons and dermatologists to the stars.

Okay. And to the CEOs of the companies?

Well, we can all use a little refreshment sometimes.

But the bigger question is, do you think that having the CPP is not to speak for them this may be their first investment in healthcare, do you think this is kind of a first solvo for them in terms of medical office? Do you see them being a partner and having this relationship grow specifically in medical office or outside of medical office and other healthcare areas?

Rich, the way I’d answer that question is, I would say they -- we first met them over a year ago. It was I believe July of last year, early July, and I would say they have spent may be more time underwriting HCN than they actually spent underwriting this investment opportunity. This is not a one time find a joint venture partner to finance a deal. This is all about HCN being CPP’s partner to enter a new class of real-estate investment for which they prior to last year when we first met them said they never really could get their hands around. So a lot of diligence went into this process, both with respect to HCN as well as the assets. I can tell you, this is an asset portfolio that anyone would invest in. It is -- the locations are outstanding, and we actually see some upside even in the some of the retail -- first floor retail that’s associated with these assets can over time be upgraded and be more in character with the luxury retailers that are one block away or on the corner. So, it’s -- this is very significant. This announcement is very significant because I think it also says that the most sophisticated real-estate investor in the world is now looking to healthcare real-estate. I think it validates what we do.

Yeah. But do you see more in the way of transaction activity in medical office specifically vis-à-vis this relationship or just generally – is this a signal that we should be expecting more to come?

I think – so one of the things that we’ve talked about Rich is that I think – I made in my comments -- I think the outpatient medical infrastructure in the major metro areas in this country is inadequate to meet the needs of driving patient population out of the hospital. So, when you think about the scale of capital that will be needed to address that issue, having a partner like CPP is very important for us. And I will also tell you that, they would consider other investments other than medical office in healthcare. I think -- this we’ll see play out over time but, their decision was more of a broad decision to enter this space with us.

Okay. And then last question, may be just a comment on the Canadian economy, I know we’re talking about the UK performance, but just in terms of natural resources down and may be oversupply of housing in some areas. I just wondered what your read is on the Canadian economy being that you’ve positioned yourself pretty substantially up there in the senior housing space.

This is Scott Brinker speaking. We don’t have a ton in those areas like sort of the middle part of the country that are heavily depended on natural resources. So, Toronto, Montreal, Ottawa, Vancouver those cities are not as impacted by natural resources. That being said, the Canadian economy is very much tied with what happens in the U.S. and I would say it’s more stable than the U.S. just given how they finance things, and the way their banks work. But as a general comment, we like the Canadian market because we own very, very low acuity and mostly senior apartments in Canada. This is a very independent living portfolio, it’s a nice compliment to what we do elsewhere and it’s very stable. So long life – stay, very high occupancies, very high margins but it’s not going to grow 5% 6% year, it’s more in the 3% to 4%, very steady, stable. And we use significant opportunity over time to then add services, particularly assisted by memory care, because just think about the fact that they are really two businesses or two sectors in Canada, there is independent living where we have a major -- and there is long term care that’s funded by the government and there is this huge area in between that’s unmet today, the same thing that existed in the U.S. 20 years ago. Now over time, that’s going to change and we think with [indiscernible] and Revera, by far the biggest players in that market will be well positioned to capitalize.

Great.

Reminder Rich, just from a financial perspective, we very much hedge the currency rates, obviously the Canadian dollar spin is late against the US dollar but it’s a reminder really for everybody, 90% of our balance sheet risks is hedged in that 75% of our earnings is hedged. So we are not really in the business of taking any currency risks.

Got you. Thanks, Scott. Thank you.

Thanks, Rich.

Your next question will come from the line of John Kim with BMO Capital Markets.

Hey, John.

Good morning, Tom. Had a follow up question on the CPPIP joint venture, can you discuss what the fees paid to you by them are, either for asset management leasing or transaction related fees?

We’ve agreed not to disclose fees with our partner. I would say that we’re taking advantage of our platform and it improves the return profile for us, but it is still a very attractive way for CPP to enter the space, because it takes a lot of expertise to do what we do.

But they will be paying some kind of fees to you?

They will. Yes.

Okay. And as far as sourcing new MOB acquisitions, do they have any right of first offers?

They do in Southern California. So it’s limited by time or investment amount, but I would say separate from what’s in the legal contracts we have every intention to substantially grow our partnership with CPP.

But at the same time, John, we’ll be also looking to grow with PSP as well. So there are two major joint venture partners now and they both – the institutions have a good relationship and we’ll be looking for ways to grow with both of them.

Yeah, PSP is a good precedent, it took us a year of working with them before they chose us as their partner on the Revera portfolio which is a company that they wholly own. That was three years ago, and in the interim three years we’ve now closed on three separate projects with them. We brought them into the Sunrise Management company, we brought them into the [indiscernible] portfolio in the UK and they’ve brought us into the SRG portfolio on the West Coast. So I think it’s evidenced that even when it comes to capital partners, we never just do one portfolio, it’s always establishing a partner and then doing things together.

Okay. Then moving on to development, I appreciate your additional disclosure on page 13, but I have to ask you question. Why are the [indiscernible] developments projecting a much higher yielder and the triple net lease senior housing? Just wanted to make sure this is apples-to-apples deals comparisons.

The difference is that when we do a triple net senior housing, there is some residual cash flow that benefits the operator. And the triple net lease, the tenant pays a lease or rent amount and keeps all the upside, okay? So if you look at the Revera properties, the unlevered return on cost is around 10%, plus or minus and our return on cost for the triple net assets are more like 8%. And the difference is the payment properties which means that we are underwriting triple net leases for 1.25 or 1.3 plus or minus payment coverage, that’s the difference.

And then outside the Revera[ph], are these a 100% pre-leased development?

The triple net leases are pre-leased from our standpoint, but from the tenant standpoint they have to lease the properties. But on day one of triple net leases, we receive the full contractual lease payment.

Okay. And the MOB as well?

Yeah, MOB we generally don’t break around and that’s really 75% pre-leased and you can see in the supplement the average pre-leasing for the current price under construction is currently at 91% pre-leased.

Great. Thank you.

Your next question will come from the line of Michael Knott with Green Street.

Hi, guys. Good morning, it’s Kevin Tyler here with Michael.

Hey, Kevin.

I wanted to ask you, it was asked earlier, and I didn’t hear it or I may have missed it, but did you provide the exact annual figure for senior housing operating same store NOI growth you’re targeting?

No, we didn’t provide guidance for the operating portfolio for the second half of the year, Kevin, we just provided sort of reaffirmed the expectations for the whole portfolio into 3% to 3.5% range.

Okay. And then I guess going back to MOB deal, given the large size of the premier location, we might have expected an even lower cap rate. I think you said it was somewhere in the high fives, but was that exceptionally high cap rate a result potentially – was there a floor on the cap rate as a result of the high price per foot?

No, it’s more of a benefit of fees that help the return from our standpoint, Kevin.

Okay. And then I guess, --

I guess Kevin, you have to remember this was on a marketed deal. This was a relationship we have, this is – we knew these assets before they were considered for sale. And the sellers saw great value in taking HCN shares. Q - Michael Knott Hey guys, this is Michael. Was this above replacement costs and was that also part of the reason the cap rate was not lower?

I don’t know it’s hard to say – I don’t anything – decades from a medical office standpoint. Remember you can’t though in Beverly Hills, you can’t even repurpose existing assets. So replacement costs is really irrelevant at this case. But we’re around I think $1,000 a foot, I doubt

I mean this is one of the top five locations probably in the world to own real-estate and any kind of real-estate can sit on the dirt that these medical office buildings are positioned and I think that Scott’s point it’s really hard to say what replacement cost would be –sufficed to say it’s a five star prime location. Q - Michael Knott Thanks for the color. The last one I had just on the Avery acquisition in the UK, I saw that you did add some capital there on the real-estate side. But I recall seeing an article that talked about potentially upping a stake that you guys have in the operator itself. Is there any validity of that?

Yeah, occasionally we say an equity stake in [indiscernible] Partners, Avery is one that we had targeted on day one of entering the UK three years ago, was a premier provider and they have lived up for that expectation. We did a big sell with them to start the relationship and then we have done a number of follow-ons both acquisition and development. And we thought they sensed actually take a stake in the operating company in itself. A small stake I think 8% 9%, it costs a few million pounds but it aligns us with a really important partner in the UK.

Okay, thanks. Hey guys this is Michael, I just have one more, obviously your senior housing operating portfolio is very high quality, but I’m just still trying to understand how the increasingly discouraging net data and also Brookdale’s struggles here, don’t have any effect on your portfolio and your validity to operate and garner the types of growth that you’re talking about.

I’ll start that off and I think we’ll all probably have a comment to add. Mike, I think that we are in the right markets where there is not oversupply. There are oversupply in many markets in the United States and those are places we do not choose to own real-estate. So, I think that’s not the one where I think we differ from the data. So, Scott?

Also as the business continues to evolve and mature you’re starting to see differentiation. So, 10 years ago from the standpoint of the outside world, everybody owned the same assets. And the asset in the middle Oklahoma that was 20 years old is viewed the same way as a building in the – or Beverly Hills. And as you know the real estate classes as they mature, I think people start to understand that performance over time and asset quality does matter, does matter where you’re located is the modern physical – invested and importantly in healthcare, do you have the best operating partner. And that’s the piece I don’t think again people fully understand but they are starting to. So now that we are entering this period where may be operations are a bit more challenged, it’s a bit choppy, I think the quality of our real-estate will increasingly standout and differentiate itself.

And what we’re saying is we have understood other sectors of real-estate. In early days, I think in that you are being you are being embraced by people underwriting healthcare real-estate. And the fact is, medical office buildings sitting in the Golden Triangle of Beverly Hills, have better prospects than medical office buildings in Lovett, Texas. Just the way real-estate works, it’s why you like [indiscernible] in Simon malls and you don’t like other mall companies that don’t have those same irreplaceable locations. Let me tell you, these medical office buildings in Beverly Hills or our senior housing assets on Connecticut Avenue in Washington D.C. or on Wilshire Boulevard in Westwood are irreplaceable locations.

Right. Thanks, guys.

Your next question will come from the line of Vikram Malhotra with Morgan Stanley.

Thank you. Hi. Just a question on for the start off on the medical office side, it seems from some of your peers that there’s probably more conference from tenants may be some longer lease terms being signed, there’s also more interest from this newer investor that you’ve highlighted. I’m just kind of wondering can you give us sense of where your cap rates could go for the next call it six months as more people might get interest in the MOB space?

For high quality medical office portfolios today it’s probably in the mid-fives plus or minus, I would say at least in senior housing and post-acute, the REITs are still the dominant funding source for M&A. So our cost of capital has increased a bit in the last few months and I think that will over time, be reflected in cap rates. So may be they will start to move up a bit, that’s certainly the way we are positioning ourselves in discussion to sellers. I don’t know that we have as much pricing power in medical office. That is also a rapid pretty substantial interest from the investment community at large. So REITs did not constitute the majority of the buyers in that market place so I think we have less ability to influence pricing. But importantly, we approach that space the same way we approach senior housing and post-acute which is doing things off market and that does lead to better pricing. I think you’ll see perhaps some other institutions entering the space, but I also think we may see some of the marginal players – I think we’re already starting to see marginal players that were circling this sector 12 months ago, have flown away a bit. So, I think those may be two factors are in play here in terms of cap rate. But I think there is some recognition that this is a good sector to invest in.

Okay, thanks. And then just on the acquisition front, you talked about potentially being a more selective focusing with your existing partners. So, assuming kind of the prices remain where they are today in terms of stocks, what are you looking at sectors and would you consider given where the balance sheet is may be changing the way you fund these? And I know you’re not looking for near-term benefit but given what you’ve done with the balance sheet is there a way you could may be change the funding of additional acquisition?

We’re not going to compromise our capital structure to – in terms of making new investments I think one of the benefits of bringing CPP in and along with PSP is we have now, a huge pool of capital to access for the right types of investments. Understand that they are very aligned with how HCN invests and manages real-estate assets across the spectrum of what we own, which starts in independent living and goes up to the front door at least in the U.S. of the acute care hospital, but doesn’t go inside those doors. We are in the outpatient, we want to do outpatient with the best help systems and we want to bring state-of-the-art post-acute care as well as build infrastructure of senior communities in the markets that need to have it. And they are aligned with that and we are going to continue to grow this business and we are going to continue to strengthen the balance sheet which I think takes a lot of risk, out of this whole equation for our shareholders.

And then just last to clarify on the Ridea side I guess, you had kind of talked about 5% at the start of the year and it’s lower now given the ongoing issues in the UK but near term improvement. But would it be safe to say that in the U.S. you are still kind of expecting that five plus percent growth for the year?

Yeah, I think it should be in that ballpark – by the end of the year I think we’ll get back there for the whole portfolio as the UK bounces back. It will take a little time.

Okay. Thank you.

Thank you.

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

Hi, good afternoon or good morning guys. Just a quick question with regards to the U.S. portfolio, could you just give us a snapshot of where the portfolio is from an occupancy perspective and kind of how you think about that evolving going forward upside or if it’s more sort of steady stay from here and all about rate growth?

Well it should be rate growth, given our locations but occupancy today for RIDEA portfolio is around 90%. So again, that’s up 60 basis points from when we last talked, when we met, so it’s moving in the right direction. But by no means, we consider 90% a fully stabilized number, we expect that to increase at least through August, September, October which are really strong months and then probably start to flatten out again in November and December.

And longer term, where do you see portfolio stabilize too?

Probably low 90s, 92%-93%, I think is a reasonable number, now that can be higher for certain sub portfolios. A number of our independent living portfolios like Merrill Gardens, SRT or Revera would have higher occupancy just because the turnover is so much lower. But for the higher acuity say like Silverado is hard to maintain 95% occupancy across the portfolio.

Great. Thanks. And just following up on Vik’s question, kind of noted that you’d expect it to slow down given somewhat dislocations in the capital markets. Do you kind of see that continuing into sort of the fall as people are expecting to see eventually high grades or is this sort of a second quarter phenomenon and you are back to the races…

Yeah, I’ll say that the whole interest rate talk creates an overhang, over this factor and particularly over the healthcare REITs. And I think that we need to – I think we need some clarity there in order to kind of the life the lid that has seemed to have appeared over our stock prices. So, that’s my – Scott you got any…

I think when we really get may be more introspective making sure we really you’re going to wagon – circle the wagon a bit, you’ll always emphasize the investments with the existing partners. And you can see almost 80% of this quarter’s 627 million is with existing partners. So we’ll always have a similar dateline level of investments off market transactions. We want to make sure that we have the financial flexibility no matter what happens in the capital markets to finance those and support our partners growth. So I believe we have many avenues for financing that growth. So we essentially available, we have an ATM that’s in place, we get about 280 million a year through our dividend reinvestment program, obviously joint venture partners. We actually added potential call it 100 million medical office portfolio to our health for sale assets this quarter that will probably happen early next year. So we’ll be looking at all the different avenues to make sure that we can continue to grow with our partners first and foremost.

Just last quick one for me, I’m not sure if you guys looked at the Omega[ph] senior house development, they put together in Manhattan. But any thoughts or color on that would be appreciative?

We think that Manhattan needs senior housing assets, it’s a market that we circle in terms of what we own with our operators but we’re not in Manhattan and I think that this is something that is needed in Manhattan. I don’t know a lot of the details of what they bought. It struck me that this is a fairly like all Manhattan real-estate deals feels very complicated. So, it’s something we’ll probably take a closer look at, so we understand what was underwritten here.

Thanks, guys.

Your next question will come from the line of Smedes Rose with Citi.

Good morning, Smedes.

I wanted to ask, you mentioned in your press release that you have a new relationship with EPAC, just wondering how may be that came about and what sort of future investing could you do with them? And you mentioned that classic senior housing into the high fives is that kind of what you are seeing for senior housing in kind of good core markets in general at this point?

Yeah, I think high fives for classic senior housing is in the right zipcode, if not, a little bit lower. EPAC is a regional provider, they are concentrated entirely in the New England market, primarily Boston. They mostly develop and operate and we bought three of their newly developed properties in towns like Wellesley, so we’re happy to have a new partner as they continue to grow their new development and hopefully we’ll be a big part of that growth.

Okay. But you don’t have any sort of agreements with them or write a first refusal as they bring properties to market for stakeholder?

We don’t – of our 30 plus operator relationships, there is a handful of it do not have contractual rights, they are handful who have exclusivity but in any of that, we have historically found a way to grow pretty substantially with everyone on the list and I would expect EPAC to be part of that team. Every member they have co-invested in this portfolio, so it’s not like they are just passive third party manager, they are a joint venture partner, with money at the stake. Whether we have a contractual obligation or not, you asked our partners, they would say they see a much broader value proposition in terms of working with us than just money. And that’s what drives that new investment flow to us, versus other sources of capital.

Okay, thank you. And then, you mentioned on your last call that same store NOI, the UK portfolio I think was down 4%. Did you provide that for the second quarter or could you?

Yeah, it was down, I believe it was 3.7% in this first quarter and then this second quarter was down 5.7%.

Okay. Okay. Thank you.

Sure. Thanks.

Your next question will come from the line of Jordan Sadler with KeyBanc.

Thank you. Just coming back to the joint venture with CPP, can you offer a little bit more color may be in terms of what this might look like over time? Is this going to be focused – I think you said it would be beyond outpatient, but how broad ranging could it be and what’s – and is there an initial sizing investment?

It’s all based on investments that we will source that fit CPP and PSP’s broader investment parameters. So there’s no specific size or numerical mandate. I think they will believe – they believe in our business platform and how that platform will source very high institutional grade investment opportunities. So, it remains to be see what that will generate over time, but we are very optimistic as they are – that given a number of things that we have in process, that there will be interesting investment opportunities for that to call it best

And just to clarify there, was it your $125 million pro rata share or investment that was done in [indiscernible] units?

That was the cash portion, the accounting gets really confusing. So if you have very technical questions, we should follow up, but the units are actually not included in the 124 million because technically that isn’t owned real-estate yet for us. Clearly these units are convertible in the cash or stock at which point it will be own real estate from our standpoint but the 124 you see is really the cash portion of the purchase.

I guess I can follow up after. I was just trying to see the number of units. And then I just noticed and had a question on dispositions obviously you had success with Life Science portfolio sale and I noticed that the health for sale bumped up sequentially, despite that sale closing in the quarter. Can you may be speak to the prospects for dispositions as you see them and what sort of the outlook might look like?

I don’t think – I think we big picture always looking calling the portfolio and being proactive and thinking about dispositions. This quarter sequential change, the Life Science portfolio was a minority investments so that number was not on that line and as I just mentioned, we did add about a 117 million, medical office portfolio this quarter for the health for sale bucket. So I would think even though I think the majority is strategic dispositions in terms of the asset that are less desirable have been called out of the portfolio really over the last three to five years will look to be opportunistic and probably have a few 100 million of asset sales per going forward.

Okay, thank you.

Your next question will come from the line of Nick Yulico with UBS.

Hey, Nick.

Good morning, guys. Just going back to the California medical office portfolio, was this purchased from Jean[ph] L realty?

Yeah.

Okay. And then did you guys have to assume any debt on this? And if so, what was the terms on that?

We did assume a small amount of debt, Nick three year term at pretty low interest rates, I think it was in the 2.5% range. So attractive debt and not much of it.

Okay. And then, what is the – what is like the net rents today for the medical office component of those buildings and other typical lease escalators?

Yeah, the net rents for the medical office sections of the buildings Nick, are in the high 50s and the retail portion of the portfolio is closer to $100 a foot. And they do have escalators, 3% to 4% per year, but we’ve been able to – historical seller now has been able to get much higher escalators upon renewal as I mentioned rate growth over the last decade in this portfolio has been 6% per year on average.

Okay, got it. That’s helpful. And then just one question on the UK, you gave I guess some numbers on where the growth was down in the second quarter versus the first quarter. How much is that portfolio NOI right now, sort of off its peak, after going through a couple of quarters of tough flu season?

The peak was last year. And it’s down 5.7%, so we’re working with a very tough cop, 2014 Nick.

Right. Yeah. I’m just trying to – I’m just thinking about how to think about over time if you have this situation where I know it was an unusually cold winter and you have a flue season. You face a period of time – you’re going to face these issues where is this going to be think the most where you’re down almost 6%, when that situation happens?

Nick, we hope it is, but this is something completely outside of our control. So, on the last call we talked about lesson learned and it’s why having a very deep bench on the ground on the UK will help mitigate some of the issues that was old when you have these very much unexpected events that can occur in our business. So, I hope it’s the worst but over time, we just never know.

Yeah, Nick, the other thing is in the three years we’ve know the assets, the NOI have been double digits to-date. So there’s been huge appreciation, it’s been a huge a tailwind for our whole portfolio. The last two quarters weren’t as good, but also remember that the UK operating portfolio is like 4% of our total portfolio. We are very well diversified, this has a very strong impact on our end net results, and that’s why you see us grow 3.2% same store last quarter despite being down almost 6% in the UK.

You can see the NOI on the back of the supplement, the effect of this quarter is down only $3 million so that’s about quarter of a penny.

Right. Okay. Got it, that’s helpful. Thanks guys.

Your next question will come from the line of Michael Carroll with RBC Capital Market.

Hey Scott, regards to your construction activity comment, how competitive are AL development your community that you have?

I don’t know Michael, I would say the line is often times a bit blurry, but from a license standpoint independent living facilities cannot have provide a number of services that most the system facilities provide. So the average age is very similar but the resonance look a lot different. So I would not consider them direct competitors they are more often complementary to one another. But on occasion, they may compete a bit.

That helps. But in your stats you said that construction activity your market is half of that as the big data, are you looking at the total senior housings, I guess construction activity or are you breaking it out by service type only comparing the AL developments versus your AL communities and the same thing with the IO?

Yeah, we’re just looking at all of the supply, local markets Michael, there is no distinction.

Okay. And then my last question little bit about the flu season in the UK, was it more severe in the UK I guess, why the flu season is being impacting your UK portfolio more than it appears that it’s impacting the U.S. portfolio. I guess that’s based on your recent quarter.

It was bad in both locations, but it was particularly bad in the UK, so our debt related move outs in the first quarter were 130% above seasonal norms, imagine the enormous number. So that’s why it’s driven the occupancy decline. Move in activity is right in mind with our budget and with history, we continue to have pricing power. It’s not a demand issue. It’s just that people got sick and unfortunately passed away and the stats bear that out. So, we’re confident that things will bounce back. We are already seeing that happen.

Great. Thank you.

Your next question will come from the line of Daniel Bernstein with Stifel.

Good morning. So I wanted to follow up on construction cost comments of 10%, we can take this offline but we can’t, does that really change the equation for operators and capitals expanding for them or – I’m sure when you’re saying that covered for construction something for getting your operators or is that your management?

No, we are seated directly. The projects we’re funding our balance sheeting that we’re involved with, for example all the Mainstreet properties, probably have exposure at one level or to 100 projects at various levels of construction in the U.S. and the UK. So we have a huge view into what’s happening in the development market place. Costs are up, labor is up, materials are up, that doesn’t mean that no one is going to build, that’s not what we are trying to say. But if it costs 10% more today than it did six months ago, that probably does impact the number of new projects that are put under construction.

Okay. That’s good color. And also follow up on that, does that impact all seniors housing equally or say does it impact urban development projects versus secondary markets does it impact living more than a bit independent living? Just trying to understand, is it across the board impacts or is there going to be more specific impact that we –

The most acute increase we have seen Dan, is in the bigger metros where senior housing and healthcare developers are competing with multi-family, in other real-estate developers for land, for labor and for materials.

Okay. And then on the capitals of the structure size of the business you did this joint venture for medical office, should we be expecting to see some more joint venture shouldn’t you or are you using that as a structure to reduce your capital leads given the back up in capital costs until the market correct itself in terms of cap rates or capital rates go back down? Is it a one-off transaction for you in terms of structure or are you thinking, you might use the JV structure a little bit more given where…

Clearly, it is another horn in the capital water for us. And we think that this is an arrangement that was not readily available to a healthcare REIT historically and we’ve worked hard to bring in two of the most sophisticated investors to help educate them about investing in this sector. So, you should expect that it is one of the ways we will finance the growth of our business in the future.

Remember Dan, the Regal transaction that we announced 770 million Canadian the Revera will co-invest 25%, they are owned by PSP and they brought us into that deal. So it’s not just CPP this PSP relationship has been really a game changer for us in the last three years and continues to be – it’s tapering us out opportunities as well.

You think there are opportunities like that with the U.S. investors or is this – is it something just not isolated I would assume that something that you could use investors around – you probably may be seeing some more joint venture opportunity with those partners?

Yes, I would say that the institutional investment world and the real-estate looks to the Canadians, I think. I think that CPP and PSP I think go a long way in validating the asset class and certainly go a long way in validating HCN as an industry. We have many discussions with other potential large pension fund types of investors that are getting interested and looking to be educated in investing in this sector, but I think we feel good about that. We’ve aligned ourselves with the Gold standards of that community and I wouldn’t be surprised if you saw some others of similar – caliber get on the HCN team.

I’ll hop off, it’s going to be a long call. Thank you for taking.

Thanks, Dan.

[Operator Instructions]. Your next question will come from the line of Tayo Okusanya with Jefferies.

Yes, good morning. Thanks for taking my question. Just a quick one for Scott and Scott on the financing side, if you were to try to do your bond deal, I’m assuming that you don’t have a bond deal today, what kind of REIT would you get on that same deal? And does that have any real impact on how you’re underwriting acquisitions?

In the capital part, today it would probably be in the 4.3% range to call it about an increase of 30 basis points. And I think Scott can address the fact that we are thinking about our cost of capital every day on the investment side. Scott you want to address that how to think about pricing deals in the current environment?

Yeah, Tayo we would definitely try to push pricing a bit. It’s easier in private negotiations than it is in auctions. But that is definitely our thought process right now.

But that would kind of change – it’s not that what’s happening with you is very consistent across all the – that has an impacted cap rate, cap rates haven’t started backing up yet?

Well it takes a while, so our cost of capital has really increased in the past few months and anyone with certain – how long it would last? Would it get worse or better? I think it’s been long enough now that we’re starting to think cap rates should need to move up a bit, for us to continue to be as aggressive as we have been.

Okay. That’s helpful. Thank you.

Thanks, Tayo.

At this time, there are no further questions. We would like to thank you for your participation on today’s conference call. You may now disconnect.