Welltower Inc. (HCN)

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Health Care REIT (HCN)

Q1 2011 Earnings Call

May 03, 2011 10:00 am ET


John Thomas - Executive Vice President of Medical Facilities

Scott Estes - Chief Financial Officer and Executive Vice President

George Chapman - Chairman, Chief Executive Officer, President, Member of Planning Committee, Member of Executive Committee and Member of Investment Committee

Stephanie Anderson - Chief Acquisitions Officer of Senior Housing

Scott Brinker - Senior Vice President of Underwriting & Research

Jeffrey Miller - Executive Vice President of Operations and General Counsel


Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Jana Galan - BofA Merrill Lynch

Omotayo Okusanya - Jefferies & Company, Inc.

Karin Ford - KeyBanc Capital Markets Inc.

Richard Anderson - BMO Capital Markets U.S.

James Milam - Sandler O'Neill + Partners, L.P.

Todd Stender - Wells Fargo Securities, LLC

Stephen Mead -



Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Health Care REIT earnings conference call. My name is Bee, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

Jeffrey Miller

Thank you, Bee. Good morning, everyone, and thank you for joining us today for Health Care REIT's First Quarter 2011 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 as well. 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 new release and from time to time in the company's filings with the SEC. I would like to now turn it over to George Chapman, Chairman, CEO and President of Health Care REIT, for his opening remarks. George?

George Chapman

Thank you, Jeff. Good morning. We are pleased to report that Health Care REIT experienced a strong first quarter in 2011. Through the execution of our disciplined relationship investment strategy, we generated a 12% first quarter return for our shareholders and remain on target to deliver outstanding 2011 earnings growth of 8% to 11%. The investments we closed in 2010 and year-to-date 2011 provide a foundation for strong future earnings growth. The key drivers of this earnings growth include internal NOI growth generated through our core portfolio rent increases and RIDEA partnership NOI growth. Our RIDEA investments are performing in line with budget through the first quarter and remain on target to generate an average of 5% annual NOI growth over the next several years. In addition, our investment pipeline remains strong, providing embedded growth opportunities through disciplined acquisitions driven by our existing partner base. We will continue this disciplined growth profile going forward.

In 2011 to date, we completed nearly $4 billion in gross investments, including transactions with Genesis HealthCare, Benchmark Senior Living, Silverado Senior Living and Capital Senior Living. We completed the closings of these portfolios on or ahead of schedule, which allowed us to raise our 2011 FFO guidance by $0.07 as these transactions will be immediately accretive to our earnings. Health Care REIT's unprecedented investment growth of $4 billion in 2011 builds upon the momentum of a $3.2 billion of investments in 2010. This extraordinary period of investment growth demonstrates the successful execution of our relationship investment strategy and will generate solid earnings and dividend growth over the next several years. By investing in industry relationships for over 40 years and providing a full service value add business platform, Health Care REIT has earned a reputation as a long-term partner of choice. During this unparalleled period of opportunity and growth, we continue to strengthen and reposition our portfolio to capture investments that reflect emerging industry trends in the evolving senior housing and health care environment. We are deploying capital, disposing of assets and deepening our management team in order to capitalize on the opportunities created through this period of change. We are staying ahead of the curve in the way we evaluate asset quality, using a comprehensive matrix that considers the quality of asset in its entirety, including the physical asset, the strength of operations, clinical quality, referral networks and strategic geographic considerations. This comprehensive approach to capital deployment is resulting in long-term consistent returns for shareholders.

Now, let me take a moment and comment on the recent announcement by CMS regarding the proposed adjustment in payment rates for skilled nursing facilities in 2012. The proposals presented by CMS are preliminary and will go through a significant period of discussion. The proposals will not materially affect Health Care REIT's payment risk, and we also believe the end result will consider the interest of all stakeholders and likely be phased in over a period of several years. Our current $1.2 billion skilled nursing portfolio as of March 31 had very strong rent coverage of 2.3x. Pro forma for Genesis, the coverage would have been a bit over 2x. These coverage levels are the strongest in our sector and have increased over 20 to 30 basis points over the last 5 years. Additionally, 99% plus of our skilled nursing portfolio has a rent payment coverage of approximately 1.7x. You should note that in anticipation of the RUGs-IV payment rate adjustments, we conservatively underwrote the Genesis portfolio at approximately 2x coverage, using a payment rate below the current RUGs-IV rates. I should also point out that our industry-leading operators have proven adept at managing through reimbursement changes by strategically adjusting their business models and consistently managing costs. Our operators' active management, together with our strong portfolio diversification coverage and systems, have resulted in consistent performance through many economic and reimbursement cycles. And we remain optimistic that we will continue to successfully lead the company through these and other challenges and opportunities presented by an evolving healthcare environment.

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