Welltower Inc.
Q4 2010 Earnings Call Transcript

Published: 16 Feb 2011

[Operator:]

Good morning, ladies and gentlemen and welcome to the Fourth Quarter 2010 Health Care REIT Earnings Conference Call. My name is Christie and I'll be your operator today. [Operator Instructions] Now, I would like to turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

[Jeffrey Miller:]

Thank you, Christie. Good morning, everyone and thank you for joining us today for Health Care REIT's fourth quarter 2010 conference call. If you did not receive a copy of the news release that was distributed last evening and this morning, you may access them via the company's website at www.hcreit.com. We are also holding a live webcast of today's call, which may be accessed through the company's website. Certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news releases and from time to time in the company's filings with the SEC. I will now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT. George?

[George Chapman:]

Thanks very much, Jeff. Good morning. It is a particular pleasure to report to you today. In 2010, our well-positioned platform, driven by our relationship investment strategy, generated a record year of investments. It only seems appropriate that in our 40th year, we invested an unprecedented $3.2 billion with leading senior housing operators and health systems. And year-to-date, in 2011, we have announced an additional $1.3 billion of high-quality investments. Relationships with best-in-class operators differentiate our company. This strategy has produced excellent portfolio results and in turn will drive strong and accelerated FFO and FAD growth for 2011 and into the future. Although we faced challenging economic conditions in the last several years, we remain steady and disciplined by preserving liquidity and completing all committed investments. During the same period, we focused on deepening existing relationships and developing new ones with senior housing operators and health systems. Our capabilities were strengthened by adding strategic, knowledgeable and experienced employees to our team. We also enhanced the full-service capabilities that make us a value-added partner. And as we've entered into RIDEA partnerships that will enhance our organic growth potential, we have added key personnel to help us in managing those relationships and adding value to the partnerships. During the last 40 years, Health Care REIT has created a foundation of relationship and trust with senior housing operators and health systems. Year after year, a large percentage of our investments are with existing relationships. In 2010, over 90% of our investments were off-market, providing Health Care REIT and our partners an opportunity to negotiate win-win capital structures. In our press release distributed yesterday, we announced four major investments with Benchmark Senior Living, Brandywine Senior Living, Senior Star Living and Silverado Senior living. These new investments included an expansion of our relationships with key portfolio companies, Senior Star and Silverado. We also formed new and important relationships with Brandywine and Benchmark, two highly regarded operators in the Northeast. The Senior Star, Silverado and Benchmark investments have joined Merrill Gardens as partnership structures formed under RIDEA. The Brandywine investment can be converted into a RIDEA structure after the first three years of the lease, subject to specified performance measures. All of these partnerships offer potential future external growth, with the right of first refusal on future investments. It is also important to note that all of these partnerships offer internal growth opportunity through occupancy, particularly the Silverado and Senior Star portfolios, with properties currently in lease up. In aggregate, the occupancy of these four new partnerships is 86%, leaving significant room for upside. These best-in-industry partnerships result in a portfolio of extremely high quality of assets in high barrier to entry markets. Additional information about these new structures and partnerships is included in our February 15 press release and on our website. The partnerships extend the company's strategy of capitalizing on favorable fundamentals in the senior housing industry by investing with innovative operators who have a track record of quality care, profitability and growth. The company anticipates earnings accretion in the short run and growth in the long run. We are quite enthusiastic about these investments and relationships and look forward to being a value-added partner. During this period of new partnership development, we also continue to grow existing relationships with our highly valued, long-standing operator partners, including Emeritus, Brookdale, Capital Senior Living, Life Care Centers of America and a numerous and notable regional operator partners. In fact, we now have 63 senior housing and care operators in our portfolio, a reliable and high-quality platform for investment and FFO growth. In our Medical Facilities division, we made investments totaling $1.2 billion in 2010, with major investments in 17 medical office buildings master leased by Aurora Health Systems, an A-rated, highly-regarded Wisconsin health system. We also invested with Forest City in seven first-class Life Science buildings in Cambridge, Massachusetts. Late in the year, we completed investments in five Florida Medical office buildings and 17 medical office buildings, primarily in the Midwest. We now have investments with 46 health systems with the potential to produce future investment opportunities. This relationship investment strategy has resulted in a strong, high-quality portfolio that we believe is one of the best in the country. Our aggregate portfolio of coverage is 2.12

[Scott Estes:]

Thanks, George and good morning, everyone. As George discussed, we are very excited about the recent additions to our portfolio, and our expectations that they will drive meaningful earnings and dividend growth for the company over the next several years. We were also pleased with the fundamental performance of the portfolio during the fourth quarter. We try maintaining coverage at an all-time high and strong same-store NOI growth that ranged between 2% and 5% across all of our asset segments. We made a decision to raise a significant amount of capital during the fourth quarter, which allowed us to form the additional partnerships announced last evening. These are all strategically significant partnerships with excellent operators and high-quality health systems that will help generate more significant earnings and dividend growth in 2011, 2012 and beyond. We believe our enhanced growth potential as a result of these investments more than offsets the minor near-term dilution, which occurred as a result of raising the capital early in completing the majority of our investments during the last week of December. Turning now to the details, as George discussed, we had a very successful year on the new investment front, completing $3.2 billion in total during 2010, which included a record $1.6 billion in the fourth quarter. In addition, the $1.3 billion of investments announced in 2011 to date, represent excellent additions to our portfolio and position us to generate FFO growth of at least 6% to 9% this year. Turning to portfolio performance, first in our stable, Senior housing and Care portfolio continues to perform well. Senior housing payment coverage remains at the solid 1.54x with occupancy increasing 1% to the current 89% level. Skilled nursing payments coverage increased five basis points sequentially to its historical high of 2.42x, with current occupancy of 85%. We generated strong same-store NOI growth rates within both the senior housing and skilled nursing portfolios during the fourth quarter. Our same-store senior housing NOI increased 2.9% versus last year, while our same-store skilled nursing NOI rose nearly 5% year over year. We also continued to see some nice progress at our entrance fee properties. As a result of this continued progress, on January 1 of 2011, we increased rent on the original nine communities operated by senior living communities by 8.3% or 50 basis points to 6.5%. These properties have a current investment balance of approximately $400 million. The 8.3% annual rent increase on these properties translates into a blended 2011 annual increase of 5.2% across our entire $653 million entrance fee portfolio. Next, I'll just briefly discuss our senior housing operating portfolio, which is comprised of our RIDEA partnerships. As of December 31, the operating portfolio consisted of our previously completed Merrill Gardens partnership and the recently announced Senior Star partnership, which closed on December 31. And we have included some additional disclosure regarding the operating portfolio for the first time on Page 24 of our supplement. Moving now over to the medical facilities portfolio. First, in regards to our hospital portfolio, fourth quarter stable payment coverage improved one basis point to a strong 2.7x overall. We also experienced significant 4% same-store NOI growth in our hospital portfolio during the fourth quarter versus last year. Our medical office portfolio had another strong quarter and finished the year exceeding our expectations. Occupancy increased 10 basis points sequentially in the quarter to end the year with occupancy over 93%, while our retention rate during 2010 was a strong 85%. We also generated solid same-store growth in our MOB portfolio, as fourth quarter same-store cash NOI increased 2.1% year-over-year. Our life science portfolio also continues to perform very well, as we saw a nice sequential same-store NOI increase of 4.1% versus the third quarter as depicted on Page 30 of the supplement. Turning now to financial results, we reported normalized FFO per share of $0.75 for the fourth quarter and $3.08 for the year, while normalized FAD per share was $0.68 for the quarter and $2.84 for the year. Our results came in below guidance as a direct result of the $950 million of capital raised during the quarter, which is not included in our previous forecast and the fact that the vast majority of fourth quarter investments occurred during the last week of the year. More important, this activity sets us up for significant growth in 2011 and puts us in a strong capital position to complete the 2011 transactions announced today. Regarding our dividend, the Board of Directors recently approved a quarterly cash dividend rate of $0.715 per share or $2.86 annually, commencing with the May dividend. This represents a 4% increase versus the previous rate. I'll now provide some additional details regarding our fourth quarter capital activity. The $450 million long tenure unsecured note offering completed in November enabled us to extend our weighted average debt maturity to nine years. In terms of equity, in addition to our 11.5 million share equity offerings in December, we issued 516,000 shares under our Dividend Reinvestment Program at an average net price of $46.50 per share, generating $24 million in proceeds. No shares were issued under our equity shelf [ph] (0

[Operator:]

[Operator Instructions] Your first question comes from the line of Jay Habermann with Goldman Sachs.

[Jonathan Habermann:]

A question for George or Scott, I guess as you look at the balance sheet, and Scott you just walked through the details. You are in pretty good shape on the financing side. But if you look at your assets, they're up about 50% year-over-year. Can you just talk broadly about the pipeline of what you're looking at today and what you think the HCN platform can handle, I guess in terms of new deal volume for 2011?

[George Chapman:]

Jay, as Scott indicated, we're not giving a guidance. We continue though because of the relationship financing program, investment program to see all the deals that are out there. We're seeing probably more senior housing opportunities right now than say medical office buildings or hospitals or the like. And in terms of what we think we will do, it all comes down to the quality of the operator and the quality of the portfolio. We're reviewing a number of opportunities right now but we're not really going to say much more than that at this time.

[Jonathan Habermann:]

And then you mentioned life science. I know 3% of the portfolio. Can you talk about the opportunities you're seeing there today because it's certainly one of the areas you mentioned in terms of growth?

[George Chapman:]

I'll just start and then maybe I'll ask John Thomas to comment on that. We have looked at a lot of opportunities with Forest City. It's a very collaborative arrangement and we have actually pursued several. And we will pursue life sciences if they are particularly attractive like our current investment in Cambridge. John, some comments?

[John Thomas:]

Just to add to that, this is John Thomas. We have looked at opportunities on both coasts in the core life sciences corridors and we expect to grow that when we find best-in-class assets located near universities and core tenants. So, we expect to grow.

[Jonathan Habermann:]

Maybe just switching back to senior housing, in terms of Benchmark and Brandywine, can you talk a bit about rent coverage, I guess more on the Brandywine side? And then in terms of I guess just potential rent growth and where occupancy is for each of those portfolios?

[George Chapman:]

We're going to be reporting growth and as a part of the four operating senior housing operators. And we're probably not going to give that much specific detail on each one of our senior housing operators every year until we maybe refine our methodology for doing so. But both Brandywine and Benchmark have a very attractive occupancy right now. They've done a great job during the downturn. They have several percentage points of opportunity to grow occupancy and they certainly have some real pricing power in a very tough area to build in and to develop in. So Scott, do you want to add anything to that? We're very pleased about Brandywine and Benchmark. We think that these are some of the best operators in the country, with some of the best assets in very tough markets and we're looking for a real significant growth there. Our approach to the four though is that we're going to be able to grow our operating platform more in the 5% to 6% range annually and they're certainly going to be great contributors.

[Jonathan Habermann:]

In terms of RIDEA in total, you said 22% of the total portfolio. How large could that grow over time? Could you mention Brandywine could, I guess convert after three years?

[George Chapman:]

Yes, we frankly hope they will. Our expectation would be that they would be able to convert in three years or perhaps even sooner, depending on what the circumstances are and how Brenda and her team sees the opportunities. Certainly, we talked in the past about 25% to 30% or so, perhaps our sort of steady-state RIDEA platform. And at this point, I would think that, that would be appropriate.

[Operator:]

Your next question comes from Yama [ph] Gailan [ph] with Bank of America.

[Unidentified Analyst:]

I was curious how you were thinking about disposition, and I know as pricing gets competitive, would you consider more than currently the $300 million you have targeted?

[George Chapman:]

What was the question, dispositions? We really have -- we undertook a process about four years ago when there were -- we are all focused on liquidity. And it was an opportune time to sort of jump start the disposition process that would otherwise take seven to eight years. So we're getting toward the end of any dispositions, for example, relate to more stand-alone Medicaid-oriented skilled nursing facilities and we have some loans that are due to be repaid this year and next that we have talked about it at undue length in previous calls. So, I think we're getting toward the end.

[Operator:]

Your next question comes from James Marlow with Sandler O'Neill.

[Unidentified Analyst:]

I want to take a sort of a different tack on the investment pipeline question. You have talked about in the past $5 billion to $6 billion investment pipeline. Recently, it's been more, you said sort of 60

[George Chapman:]

As you point out, we're doing about $5 billion. We did $3.2 billion last year. We've announced $1.3 billion this year and we frankly think that the pipeline is probably going to refill and it's probably going to be oriented a bit more toward senior housing as I said earlier than the medical facility side. But I would point out we did $1.2 billion in the medical facility side and all of the noise and whatever about how well we did in senior housing, I'm real pleased about John's group and what they've done. But I think it sort of remains the same. We're just not in a position right now to tell you it's going to be another $2 billion or $3 billion or whatever the number is. It's a little hazier today than it was going into the second half of last year.

[Unidentified Analyst:]

And then you look at on the construction side in 2011, the development balance is going to come down as you deliver projects. Are you seeing more opportunities to refill the pace of new construction and is the 6% to 8% that you talked about now, is that sort of a target or should we think about that more as an upper range of where you would be comfortable with that exposure?

[George Chapman:]

I think that's probably an upper range. And the talk about development about two years ago, when the markets sort of fell apart and we had higher than normal development. This is where we tend to be in our development pipeline and most of those will be in a substantially pre-leased and medical office buildings with great systems or some outpatient facilities connected to, related to, affiliated with the really good health systems, as well as some senior housing generally as part of a master lease. So, we will do development. We're geared up to do it. It's particularly important in the health system arena where they have to develop new medical facilities that are appropriate for the customer and are appropriate for the outpatient nature of procedures today. But I think that's right. 6% to 8% is probably the high end.

[Unidentified Analyst:]

My last one here, the G&A looks like it's gone up quite a bit. Is that just simply a product of the expanded team given the investment activity in monitoring the new relationships? Are there are other items that are on top of that, either related to the RIDEA structures or something else?

[George Chapman:]

I'll make a couple of comments and then I'm going to turn it over to Scott to follow up on some of his comments he made in his initial remarks. But generally, we have tried to stay ahead of the game in terms of bringing in top-flight people as I said in my remarks. We brought in a lot of people in the medical facilities area, including people who are quite good and add to our property management team, as well as our development group. And then, as it relates to senior housing, Chuck has been very active in bringing in folks like Stephanie Anderson to add to our resources there. And the effect has been very good. We also said that with the RIDEA structures, we are going to bring in a team that will add value. We've already added two to three people and are looking to add two to three more people as well. We think that the way the Health Care REIT world is evolving, is that we're really a complete company, instead of, hey we're not just an entrepreneurial financiers. We're full-blown companies, with top infrastructures and top people and that's how we position the company. Scott, do you want to add anything?

[Scott Estes:]

Yes, James. I think I just said, my answer to your question would be really no. There's nothing beyond just the infrastructure improvements that we really begin as we've embarked on this initiative to grow the portfolio very significantly, really beginning in 2010. And obviously, going in continuing into 2011. Obviously, moving from roughly $6 billion in assets now to pro forma in excess of $10 billion, we've started, as George mentioned, staffing for the growth beginning probably middle of 2010 and when you kind of just look at where the numbers play out, you have the high quality team in place. It's virtually all staffing related. And I think as a percentage of either assets or revenue, it's flat to even slightly down based on the aggregate portfolio.

[Operator:]

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

[Jerry Doctrow:]

A couple of things. On guidance, I guess this is Scott's question. What do you assume on the capital raising side? Any equity offerings? I guess just the stuff you mentioned coming from the DRIP. Just want to clarify that side of it.

[Scott Estes:]

Sure, Jerry. I think the point of where we're at from a capital position shows that we have a lot of flexibility here entering 2011. But I guess for modeling purposes, we've always assumed the blended mix of 45%. That 55% equity kind of our standard in terms of incorporating and providing guidance to you all.

[Jerry Doctrow:]

And I think it was probably just some rounding but I just wanted to sort of clarify a couple of things that you went through the capital needs end. You had talked about $1.5 billion. I think that's what you said unless I misunderstood you. You really talking about the stuff that has been funded or committed to the $1.3 billion for the first part of this year.

[Scott Estes:]

Yes, the aggregate of the announced $1.3 billion of acquisitions and joint venture fundings plus $200 million of projected development fundings from the projects that are underway this year.

[Jerry Doctrow:]

Just any more rationale just about sort of not assuming sort of investments. You've done that sort of historically in terms of your future guidance.

[Scott Estes:]

Sure. We thought a lot about it. We've spoken at length about our pipeline. I think George gave some color. Obviously, we still feel like our position and our investment opportunities are strong and a lot of it will be recurring business from our existing portfolio of senior housing operators and health systems. I guess the short of it is we feel like it will be easier to just communicate the investments as they come through as opposed to proposing some level of hypothetical guidance and then hypothetical capital raises. In our opinion, it will just be easier to talk to you as they come through.

[Jerry Doctrow:]

Just one or two more for me. The FFO guidance from what we expected, FAD was a little bit lower. Are there any capital CapEx funding needs or anything else that's sort of changed on the FAD side that we should be thinking about? Particularly as you get into RIDEA, there's some stuff in lease up, do you have CapEx per unit or something like that we should be thinking about?

[Scott Estes:]

Sure. There's obviously some more CapEx that are included in the FAD guidance and it's a blend of really what we're projecting in our operating portfolio, combined with what we project in our medical office portfolio. And I think when you put it together, it's probably in the $30 million area in aggregate. I think we're projecting, correct me if I'm wrong, pretty typical, about $1,250 per unit of CapEx in the operating portfolio would be a rough estimate.

[Jerry Doctrow:]

And there's no big, on the MOB side, there's no big tenant roll-over or extra TIs that's running about where it was on CapEx.

[John Thomas:]

Yes. This is John Thomas. That's correct. We got a very low rollover this year and next. So that's consistent with 2010 on those numbers.

[Jerry Doctrow:]

Last thing for me, I was wondering how you think about, and I've actually didn't get to calculate cost per unit, but cost per unit on the stuff maybe you bought in the new senior housing stuff that you announced? And how do you think about replacement costs on those properties?

[Charles Herman:]

As far as replacement costs, we're seeing in these types of markets, they're very difficult to build in, very difficult to construct and you expect in the New England and mid-Atlantic states to be at least $250,000 to $300,000 a unit, plus some fill-up costs to stabilize those assets. So that's not uncommon for us to see. The other portfolios were not in the higher -- were not in New England or mid-Atlantic states, some were in California. They're a little bit different. They're in the $200,000 to $250,000 range to redevelop, reconstruct, so that's kind of typical.

[Operator:]

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

[Richard Anderson:]

Just a couple of questions. First on development, you're going to complete nearly $500 million in 2011. One of the issues with HCN maybe some of this pushed back a little bit now, may becoming an opportunity is your exposure to development. Do you see development? Because at this point, I think it's in single digits as a percentage of your total assets. Do you see ramping up development, new investments over the course of the next few years?

[George Chapman:]

Rich, Chapman here. I already mentioned that, that 6% to 8% is probably at the high end but we do view development as a particular opportunity that will even lead to monetization of existing assets with the great health systems. And there's clearly a need for a more customer friendly facilities, outpatient and otherwise, in the medical facilities area. And then from time to time, given the demand supply components, if we can add a very good senior housing asset into an existing master lease with one of our top partners, we will do that. But you should be looking at that range, 6% to 8% going forward.

[Richard Anderson:]

One of the things that's happening in the Health Care REIT space is there's a lot of transaction activity. My pipeline is bigger than your pipeline type of thing. I guess, I wonder now that you're saying that there's not a whole lot of or as much visibility into your pipeline on a go-forward basis, I mean is that kind of a wink that you're willing to kind of slow it down a little bit, allow some of these deals to marinate and maybe address the potential that you have become too big to grow type of phenomenon?

[George Chapman:]

I think that we're gearing up. We have already geared up to manage our company, which is much larger and more complex than it used to be and appropriate for a Health Care REIT going forward. We are adding to our RIDEA team. We are very capable of running all of these new investments and adding value to our RIDEA and other partners. So, I don't think that is a constraint but we are only going to do projects that really makes sense to us. And I just can't predict, Rich, whether we're going to find a number like we had last year or we're going to actually not even have the same type of year that we did last year. It's just difficult to say. We didn't go into last year thinking what we we're going to do is $3 billion necessarily. But because of the pent up demand, I guess, for financing and the need of private equity firms that were approaching their front lines [ph] (0

[Richard Anderson:]

But you don't think that there's a too big type of number in your mind? You could grow and grow and grow as far as you're concerned?

[George Chapman:]

I think we can. I suspect that at some point, when the three REITs that seem to be growing most quickly get to 20% or 25%, it's going to be more difficult to grow at 6% to 7%. It might be 4% to 5% but you have to look then at the risk-adjusted return to people. So I sort of view the perceptions as changing over time as some of the larger REITs get much larger. But we have a lot of very good transactions we can pursue and we're looking forward to it.

[Richard Anderson:]

On the topic of RIDEA, can you comment on -- you and others taking on more risks and kind of transitioning from a conventional Health Care REIT and how investors should view the risk perspective of your company as you take on things like occupancy opportunities in Silverado and others. I guess the risk perspective is changing for you and I wanted to see how you think about that as a long-term issue for your company.

[George Chapman:]

I think Scott made the point very precisely in his comments that we see a balance between triple net lease portfolio and the operating portfolios being very appropriate and that it is just one more way in which we can diversify and provide a better risk-adjusted return to our shareholders. In terms of the particular risk, we have done business with Merrill Gardens and Silverado for almost 15 years now. We've been their partner. We know what they do and we know how they do it and we think we're going to be right on top of those. And as you look at our good friends at Brandywine, Benchmark and Senior Star, who we have been involved with in the industry forever, we think we have best-in-class operators and think that the risks are minimal and very manageable and that our returns, which will be greater than the normal triple lease, more than make up for it.

[Richard Anderson:]

One last question is on the entrance fee issue. You mentioned the 8.3% increase in rent for senior living communities. I guess that's about eight of the 13 that you have outstanding in entrance fees, is that correct?

[Scott Estes:]

Rich, it's actually 11 of the 13, that’s all fees, the vast majority of that portfolio.

[Richard Anderson:]

What amount is still left on the table in terms of recapturing some of the deferred rent that you gave away at the bottom of that market? Do you see significantly more to catch up on in future years or do you think you get back to where you kind of started with this increase during 2011?

[George Chapman:]

I think we sort of look at it as catching up in two or three years and then perhaps going past and averaging out about the same that we would've otherwise. So much of it depends on when the economy or if the economy regains its previous form and the housing markets come back. But the way we're looking at is we're going to move. I think it's Scott, isn't eight out of this 11 that are moving ahead at the 5%?

[Scott Estes:]

Nine.

[George Chapman:]

Nine. Then we can move those ahead at 50 bps increasers for the next several years and I don't want people to model more than that until the economy really gets going. And then the entrance fee communities, will be the greatest beneficiaries of a faster growing economy.

[Richard Anderson:]

So the recovery of the entrance fee issue is this is the first of a say two- to three-year process?

[George Chapman:]

I think so.

[Operator:]

Your next question comes from the line of Michael Mueller with J.P. Morgan.

[Michael Mueller:]

On the Senior Star acquisition, I think the going-in cap rate was a 6%, but you have some properties in fill up there? If you exclude those, can you talk about what the yield would've been on that portfolio?

[Scott Estes:]

Do you want to walk him through that, the Senior Star portfolio?

[Charles Herman:]

New acquisitions were around the 7% yield going in. We had some properties in fill up. This is Chuck Herman. We have a couple of properties in fill up and then we bought a stable portfolio, with some room but generally stable at around a 7% yield.

[George Chapman:]

And we do think that the Senior Star portfolio could have one of the highest growth rates in the NOI side. So we're very much looking forward to doing a lot of business with Bill and Bob Thomas going forward.

[Michael Mueller:]

And then on the projected growth of call it about 5% to 6% on the RIDEA assets over the next few years, can you clear that up? How much of it do you see coming from occupancy versus pricing. I know you mentioned the portfolio is on average were about 86% leased. So is it, would you say it's 2/3 occupancy pick up and the balance on pricing or is it even more skewed towards occupancy?

[Scott Estes:]

This is Scott Estes, again. We will talk in terms of the aggregate portfolio and I do think you're right. That is in our opinion, a good representation of the opportunity on the occupancy front. The fact that the blended portfolio is about 86% occupancy. But I think as you can tell from the data that the Senior Star and the Silverado portfolio is due to having some assets in essence and fill up had some bigger opportunities there. So the short of it is there's some significant opportunities on occupancy. I'd say somewhat of an occupancy opportunity on both the Merrill Gardens and Benchmark over time. But I think those that are the more stable assets have the best pricing power would probably where you’d see that the margin expansion opportunity is due to their strong market positions and pricing power. So it's really a blend of both and I would actually, I think we're very comfortable with those projections based on the numbers that we're looking at right now.

[Michael Mueller:]

And last question. Keeping with you for a second, the $3.08 for 2010, $0.75 in Q4, when you look at the numbers and the timing differentials between the acquisitions and the drag, about how much per share do you think the drag was in Q4?

[Scott Estes:]

By our calculation it was about, the capital will be raised at about $0.05 diluted in the fourth quarter. We raised about $450 million of 5.03% debt in early November and then 11.5 million shares of equity in early December. So aggregate, we calculated about $0.05. And really, honestly, on the timing, we're just talking about that, Steve, [ph] (0

[Operator:]

Your next question comes from the line of Rob Mains with Morgan Keegan.

[Robert Mains:]

Scott, I want to clarify a couple of things. First of all, earlier question about G&A, am I correct that the fourth quarter figure specifically does include that $1 million of stock compensation grants?

[Scott Estes:]

That is included in the fourth quarter number, yes.

[Robert Mains:]

So a normalized number would be $1 million lower?

[Scott Estes:]

That's correct. That was in the release Rob, in the first quarter, traditionally we have about $3.9 million of accelerated vesting of grants as it detailed in the press release. Remember to do that.

[Robert Mains:]

Right. And then I have a question before the year, senior housing NOI number gets swamped by the new deals. In the fourth quarter, we just had Merrill Gardens. And stop me if any of my numbers are wrong here, but in the third quarter, you had Merrill Gardens on a weighted average for less than a month because some of the properties closed later. And you did $4.8 million in NOI, and if I just multiply that by three, I would've gotten $14.4 million and your fourth quarter number was lower than that. Was there anything going on with that portfolio specifically in Q4?

[Scott Estes:]

No, Rob. As I recall in the month of September in particular, I recall there was a $200,000 or $300,000 adjustment. That's a positive adjustment in that month. Again, I still think the best way to think about the Merrill Gardens portfolio is occupancy was stable. And again, we're getting an approximate 7% return currently and we'll continue to roll that out as a part of the portfolio in 2011.

[Robert Mains:]

So the full quarter that we saw in Q4 is probably a better run rate to use?

[Scott Estes:]

Sure, if you're trying to model it by operator, sure.

[Operator:]

Your next question comes from the line of Dustin Pizzo with UBS.

[Ross Nussbaum:]

It's Ross Nussbaum here for Dustin. On the operating side for the senior housing assets, what kind of geographic, non-compete clauses do you have built into the contracts? Can you continue to acquire assets in the markets where these operators are operating?

[George Chapman:]

Typically, it's a 3-mile to 5-mile radius. We do a pretty good job though working with our operators to make sure we're not going to be competing with ourselves. We have a great ongoing relationship with these folks. We know exactly what the development plans are. Where they’re looking to acquire. So we feel pretty comfortable with that kind of number.

[Ross Nussbaum:]

Specifically on the Brandywine portfolio, how do you define what fair market value is in terms of the rent reset?

[Company Speaker:]

If the parties can agree, this is Scott Brinker speaking, it will be subject to an appraisal. I would just remind you that there's always a floor of the prior year plus the increaser. So there's only upside in the reset opportunity for us.

[Ross Nussbaum:]

So would it be fair to say you look where the cash flows on that portfolio are in three years and hopefully have a meeting of the minds in terms of what an appropriate yield would be if you will from a rent perspective?

[Company Speaker:]

That's right. The other point is our hope is that this converts into a partnership structured as RIDEA within three years or so.

[Ross Nussbaum:]

And that was the second part of my question on Brandywine, which is a -- it looks like there's a skilled nursing component there. How does that fit in under the RIDEA structure? Is there a private letter ruling that's needed or do you think it's going to be okay?

[Company Speaker:]

This is Scott again. Skilled nursing would be permitted under RIDEA and that's one sub-acute unit within an assisted living facility. And Brenda and her team actually have a history of operating skilled nursing in sub-acute units.

[Operator:]

Your next question comes from the line of Tayo Okusanya with Jefferies & Company.

[Omotayo Okusanya:]

A couple of quick questions. The Benchmark deal, just for modeling purposes, a date for closing. I think your press release said the first half of the year but the GPT press release said first quarter?

[Scott Estes:]

I think that projection is I hope it’s roughly right around the borderline between the two quarters. It may be right at March 31 to April for your modeling purposes.

[George Chapman:]

It's a function of licensure transfer and debt assumptions. That's what's driving those issues. We've come to all agreements. We're ready to move forward with the transaction.

[Omotayo Okusanya:]

And then after you do all your charge transactions, you give us a number of 22% of your assets will be within the RIDEA structure. So we'll get a sense of what the percentage of NOI, that would be?

[Scott Estes:]

Let me think about it, Tay, and get back to you. I don't want to give you a wrong number on the call here.

[Omotayo Okusanya:]

Going back to an earlier question that was asked, the whole idea of the risk profile changing as you're increasingly exposed to the business cycles of senior housing, I'm just trying to get a sense of how you would tackle the world where fundamentals begin to turn negative. I think right now, you're getting into those house fundamentals are going to turn positive, but once the business cycle changes again, how do you deal with that?

[Scott Estes:]

There tends to be only about 15% to 20% of the cash flow that's really going to be all that variable. That's what in effect we're trying to capture with these transactions. So these assets are going to yield because of the types of operators that we are working with, the quality of the assets, the location. There's going to be a yield from these assets. So it's not like they’re going to drop off the face and go negative on us.

[Omotayo Okusanya:]

I asked because this company has such high operating leverage though, like in a tough environment, just a slight drop in vacancy really causes a big impact into overall margins. And I guess, how do you protect yourself against that. When the business cycle ultimately turns again, whether it's five years or 10 years from now?

[Scott Estes:]

I could try to answer first then Scott Brinker could add to this. I would point to the track record of these best-in-class operators in the in fill markets and I believe Tom is very excited, the fact they've grown NOI 7% on average over the last what, four to five years. Obviously through one of the biggest downturns and we always speak of the resiliency of the senior housing industry even being not entirely resistant but somewhat resistant to economic downturns. So our view is yes. You may not get 5% plus every year but the down year shouldn't be that bad and on average, we should be able to get in excess of 5% returns over time.

[Omotayo Okusanya:]

One more question, I appreciate you indulging me. The MOB platform, the 1% to 2% cash NOI gross projection for 2011 with flat occupancy. I'm just curious if you could break that out in regards to what you're expecting by way of revenue increases and also operating expense increases?

[John Thomas:]

This is John Thomas, again we don't have a lot of roll this year, so most of that is coming from the built-in increasers and we're tightly managing the expenses and frankly lowering our costs, particularly on property taxes and energy costs. So it's a lower year and there's still is some rate pressure out in the market. So that's the tie together.

[Omotayo Okusanya:]

So is it fair to say something like 1% revenue increases and expense is flat or. . .

[John Thomas:]

Closer to 2% revenue and 1.5% on the expenses, so 1%.

[Omotayo Okusanya:]

1% increase?

[John Thomas:]

Yes.

[Operator:]

Your next question comes from the line of Michael O'Dell with AIG Asset Management.

[Unidentified Analyst:]

Just one question going back to the increased operating leverage with regards to the RIDEA structure, and just what type of leverage in terms of the debt to EBITDA basis you're targeting on a financial perspective?

[Scott Estes:]

This is Scott. I would point out we were talking about the way the adjusted EBITDA page looks in our supplement. It's obviously skewed by the fact that we completed a very significant amount of these investments on the last, really, days of the quarter. So what you see on our supplemented net debt to EBITDA of 7.6x, basically using the annualized EBITDA from the investments we made in that last week, it would go down to about 6.7x to 6.8x. And our model this year shows roughly 6x to 6.5x is what we are basically what we're trying to get to in our internal model this year.

[Unidentified Analyst:]

Just in terms of the decision to utilize the bridge facility, it seems like you have availability on the credit line. Just what's the thought process there?

[Scott Estes:]

We do, and I think you're right. I think at the end of the day, the bridge is put in place to provide both flexibility from our perspective and just surety of financing. And we'll see in another month and a half or so if it's needed. But we haven't determined that. It's really was just done for flexibility from a capital management perspective. I think Mike -- again, the key is really we would manage the balance sheet to the 45%, I think or less over time debt to undepreciated both tax levels.

[Unidentified Analyst:]

So you don't think taking more operating leverage would lead to an issue in terms of taking the same if not more financial leverage. Do you think you're fine and you're comfortable at that somewhat 45% level?

[Scott Estes:]

Yes.

[Unidentified Analyst:]

Just in terms of the one the rationale for the sellers in terms of monetizing their ownership interests. It seems like mostly founders out there for a while making that decision. Just some more color on the incentive management fees and whether that's profit driven or revenue driven?

[Charles Herman:]

This is Chuck Herman again. The incentive management fees are a function of several different factors. Sometimes it's revenue related, clearly NOI related and occupancy. They're all different factors that we roll into the overall calculations. Each one's a little bit different depending upon the deal we could structure. So it changes based on the operator. But those are the basic levers that we can use.

[Unidentified Analyst:]

So for these recent transactions, in terms of just a proportion of the deal either NOI driven or top line driven. Could you give me a sense or no?

[George Chapman:]

It's mostly based on NOI.

[Charles Herman:]

But to your comment on the rationale for the sellers on all these transactions, is that the question?

[George Chapman:]

Some of the sellers were larger private equity folks that were looking to monetize. That was the case in a couple of instances, in most of the instances. The other was the management team looking to recoup some capital and then have a platform to grow additionally. So, those are the two main reasons.

[Operator:]

Your next question comes from Michael Bilerman with Citi.

[Unidentified Analyst:]

It's Quentin Valeli [ph] (1

[Scott Estes:]

This is Scott. I'll try to answer. I don't do their calculation, so I don't know for sure. But I think part of it is theirs is based on a trailing number and also the management fee is different. I believe they paid a 7% fee versus the 5% fee that we're paying Benchmark. That accounts for quite a bit of the differential, 50 basis points or so. And I think the rest is just standard NOI growth from 2010 to 2011, which is consistent with what they've done over the last four years during a pretty challenging economic climate.

[Operator:]

[Operator Instructions] Your next question is a follow-up from Jerry Doctrow from Stifel Nicolaus.

[Jerry Doctrow:]

Scott, I thought you said that Brandywine closed at the end of the fourth quarter and I thought that was a first quarter deal. So can you just clarify which of these closed fourth, which of these closed first and maybe give me a little more color on the additional transactions that closed in the [indiscernible] (1

[Scott Estes:]

I'll probably point you to the Page 2 of our earnings release that has the four bullets that says the fourth quarter investments, Jerry. Walking through those, the Brandywine closed in December. You really can just reiterate it.

[Operator:]

Your final question comes from the line of Tayo Okusanya from Jefferies and Company.

[Omotayo Okusanya:]

Just a couple of quick follow ups. The disposition of $300 million for the year, I know Jana had asked about it earlier but could you give us a sense of what assets you're looking at?

[Scott Estes:]

Sure. It's a blend of primarily senior housing and skilled nursing assets. Again, the number is approximately $300 million, as George pointed out, a good bit of that are some loans this year, about $150 million plus are actually loans. So that would be the rough overview. And it is skewed more likely to happen in our model in the first half of the year.

[Omotayo Okusanya:]

Are you selling the loans or are the loans are just maturing?

[Scott Estes:]

Couple of the loans are maturing, the maturity dates.

[Omotayo Okusanya:]

And then just last question with you, George. It's more directed towards you but with you firing on so many cylinders right now, what’s kind of keeping you up at night or what do you worry about as you kind of think about the evolution of HCN over the next three to five years?

[George Chapman:]

Tayo, what we've been building the last two or three years is a full-service platform and it's working, and it allows us to invest across the full spectrum of healthcare. And to do what's necessary to be a valued partner, i.e. in the medical office and the medical facilities area, being able to do property management, do planning for health systems, do development if necessary. In senior housing, we've added a lot of people because we have larger partnerships in the RIDEA structure or perhaps much more of a true partnership and the need to get on the ground and really be a help. So I think what would keep us up at night would be just that. Do we have the right infrastructure and the right people in place? We're continuously looking at it. As you look at our employee base, it is right now, we are 250 employees. I think we've done a pretty good job at being proactive. But as this very large investment opportunity continues, we're just going to have to keep working to enhance our capabilities. That's what I think my job is, is to make sure that we're in a position to handle all of these investments and to be a good partner in the RIDEA structure specifically, but also the health systems and our ongoing operators as well.

[Operator:]

That concludes today's question-and-answer session for today. I'll hand the program back over to Mr. George Chapman for any other further comments or closing remarks.

[George Chapman:]

I would just add that we appreciate your participation. Good questions. I think this relationship investment strategy is working. It's driven a very disciplined growth platform and we're looking forward to producing very strong FFO and FAD that should translate into a very good shareholder value in the future. So, thanks very much.

[Operator:]

This concludes today's conference call. You may now disconnect.