Health Care REIT, Inc. (HCN)

HCN 
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Industry: Consumer Services
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Health Care REIT (HCN)

Q3 2012 Earnings Call

November 06, 2012 10:00 am ET

Executives

Jeffrey H. Miller - Executive Vice President of Operations and General Counsel

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

Scott M. Brinker - Executive Vice President of Investments

Scott A. Estes - Chief Financial Officer and Executive Vice President

Charles J. Herman - Chief Investment Officer and Executive Vice President

Steven Mohr - Senior Vice President of Finance

Jay Morgan - Vice President of Acute Care Investments

Analysts

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

Jeff Theiler - Green Street Advisors, Inc., Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Wilfredo Guilloty - Morgan Stanley, Research Division

Nicholas Yulico - Macquarie Research

Philip J. Martin - Morningstar Inc., Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Thomas C. Truxillo - BofA Merrill Lynch, Research Division

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Alex Fridlyand

Todd Stender - Wells Fargo Securities, LLC, Research Division

Tayo Okusanya

Michael Carroll - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2012 Health Care REIT Earnings Conference Call. My name is Brooke and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

Now, I will turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

Jeffrey H. Miller

Thank you, Brooke. Good morning, everyone, and thank you for joining us today for Health Care REIT's Third Quarter 2012 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 www.hcreit.com. We are holding a live webcast of today's call, which may also 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 it's projected results will be obtained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release, and from time to time, in the company's filings with the SEC.

I will now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT. George?

George L. Chapman

Thanks very much, Jeff. Our business model continues to hit on all cylinders. We completed $2.9 billion of investments today, including $1 billion in the third quarter. And since the beginning of 2011, we have made $8.9 billion of investments through the third quarter. And pro forma for the announced investments, including Sunrise in early 2013, the investments during the last year will total approximately $12 billion.

The strength of our relationship investing program is also clearly demonstrated by the investments during the last 12 months as approximately $2.6 billion or 64% of the $4.1 billion of investments over that period came from existing relationships.

We announced the agreement to purchase Sunrise in August of 2012. There were few opportunities, if any, to acquire a company of this scale and quality. The acquisition of Sunrise is a great fit for HCN. It provides us with an exceptional portfolio in the United States, the U.K. and Canada at an attractive yield with strong accretion. There are meaningful growth opportunities, including both long-term NOI growth and a pipeline of exceptional properties. Moreover, Sunrise has a national platform with a widely recognized brand, which positions it as a vehicle for a future consolidation of a highly-fragmented industry. Scott Brinker, in his remarks, will provide a detailed update on our Sunrise progress. Let me say this generally. We've accelerated the joint venture buyouts so that by the middle of 2013, we expect to own 100% interest in 115 Sunrise communities, and a minority interest in 10 communities for a total investment of $4.3 billion. Moreover, the overall cap rate will be approximately 6.5%, making the transaction very accretive to us.

We also previously announced our agreement to sell the Sunrise management company to a group led by KKR and Beecken Petty, with HCN retaining a 20% interest. Our partnership and Sunrise teams have been working hard at organization and integration and expect to hit the ground running when we close the transaction in early 2013.

I wanted to take a moment to thank Scott Brinker, Chuck Herman and our team. Mark Ordan and the team at Sunrise, as well as our management company partners for putting us in a position to produce terrific value for all parties and contribute to the continuous improvement of the seniors housing sector generally.

Our existing portfolio continues to perform very well with an aggregate NOI growth of 3.6%, driven by 7% NOI growth in our RIDEA portfolio. In fact, our average same store NOI growth over the last 6 quarters was 4.2% for the entire portfolio and 8.9% for the RIDEA portfolio. We believe that the ongoing repeat business from our RIDEA partners, together with a strong NOI growth on these investments, demonstrates the success of the RIDEA program. And the strength of our existing portfolio and predictable pipeline, of course, allowed our Board of Directors to increase our 2013 dividend payment by 3.4% to $3.06 per share.

Our senior housing portfolio quality continues to improve. After we close the entire $4.3 billion Sunrise portfolio by midyear 2013, we believe the private pay percentage in our portfolio will approach 85%, the percentage of the total portfolio in the East and West Coast markets and the top 31 MSA should move to 80%, while our RIDEA portfolio will approach 95% in these affluent, high-barrier to entry markets. And at that point as well, our senior housing portfolio is -- a portion of our portfolio should be approaching 2/3.

In the senior housing and care space, we regularly coordinate best practices sessions among our key operators. We focus on providing the best care for residents. And though -- even beyond those formal sessions, many of our key operators have developed deeper, personal and professional relationships that allowed them to discuss ways to improve care and service.

We've also driven better results through joint programs such as our group property and casualty insurance program. This resulted in average savings of 18% when cost for such insurance were going up by 5% to 10% otherwise. We're now working on a joint purchasing program. And we're beginning to explore ways to facilitate meaningful IT improvements to make normal operations more efficient and effective, and to ultimately allow interaction between these operators and health systems and service providers with whom they work.

Let me now turn to the medical facility sector. And we continue to believe that there are significant investment opportunities in the MOB arena. Today, approximately 60% of the acute care services are being provided in outpatient setting, and many of them where these services are offered, are located close to the customer, in suburban areas that are experiencing the greatest population growth. To provide convenient one-stop venue, MOBs are combining a variety of complementary services, including surgery centers, full diagnostic services and fitness and wellness. Today, we are investing in MOBs that range from 50,000 to 300,000 square feet and these facilities, which some now refer to as hospitals without beds, are becoming the focal point of healthcare delivery.

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