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Health Care REIT Inc. (NYSE:HCN)

Q1 2009 Earnings Call

May 05, 2009; 10:00 am ET

Executives

George Chapman - President & Chief Executive Officer

Scott Estes - Chief Financial Officer, Executive Vice President

John Thomas - Executive Vice President, Medical Facilities

Jay Morgan - Vice President of Acute Care Investments

Jim Bowe - Vice President of Communications

Analysts

Karin Ford - Keybanc Capital

Richard Anderson - BMO Capital Markets

Jerry Doctrow - Stifel Nicolaus

Dave AuBuchon - Robert Baird

Robert Mains - Morgan Keegan

Omotayo Okusanya - UBS

Jim Sullivan - Green Street Advisors

Operator

Good morning, ladies and gentlemen and welcome to the first quarter 2009 Health Care REIT earnings conference call. My name is Allison 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 presentation. (Operator instructions)

Now, I would like to turn the conference over to Mr. Jim Bowe, Vice President of Communications for Health Care REIT. Please go ahead, sir.

Jim Bowe

Thank you, Allison. Good morning, everyone and thank you for joining us today for Health Care REIT’s first quarter 2009 conference call. In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the company’s website at www.hcreit.com.

I’d like to remind everyone that 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 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’d like to now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT for his opening remarks. Please go ahead George.

George Chapman

Thank you, Jim. My comments today will center around the execution of our current game plan and also address briefly, how we are positioning the company in long term. First, I’ll deal with liquidity, which is foremost in everybody’s mind in today’s marketplace.

During the 15 months through the end of the first quarter ‘09 we raised approximately $1 billion of equity capital, including $211 million in the first quarter of this year in an inclusion trade and as we previously reported, we recently closed on a $133 million debt transaction with Freddie Mac and expect additional secured debt proceeds of between $200 million and $300 million later this summer.

In addition, in the first quarter we generated $63 million in cash from asset sales as we continue our long standing practice of recycling assets to attain a portfolio with the most modern compelling senior housing and medical properties. We believe we are on track to reach our goal of $200 million to $300 million of assets sales this year. I should point out that in 2008 we received proceeds of approximately $350 million as well, due to recycling of assets.

As a result, all of these capital raises and sales, we currently have over $300 million of cash surplus even after funding our development pipeline and debt maturities through 2010 and with our planned additional debt transactions this summer we expect to have adequate liquidity into the mid 2012.

As it relates to the portfolio, I should note that Scott will go into more detail relating to portfolio performance, yet I did want to make a few broad comments. First on the MOB portfolio, the medical office building portfolio, it is performing as expected with a number of new leases with even longer than expected terms.

Moreover, with some new MOBs with strong health system sponsorship opening in the next several quarters and with the ongoing disposition of our MOBs held for sale, the quality of our MOB portfolio will be substantially enhanced and we expect a very strong occupancy by year end.

On the senior housing and care side, there are some challenges pose by the housing market crisis and yet hopefully the pending home sale increase in March is our harbinger of better times ahead. Within our portfolio, our assisted-living portfolio occupancy increased, while the independent living portfolio saw only a modest decrease.

In the CCRC entrance fee communities of which we have 15, sales continue to be somewhat slow. However, we are seeing an increase in presales and move-ins in the first quarter with an up-tick certainly in operator optimism. Clearly, the stock market improvement has had a very positive effect on customer’s attitudes.

Although, we are cautiously optimistic, we continue to monitor each community with weekly reporting to senior management regarding sales and lease-up. We continue to believe that overtime seniors will be more attracted to larger communities with more amenities, such as combination facilities and full blown CCRCs.

In fact, the recently published independent living report by OSHM that came out this week found that larger communities received higher satisfaction ratings from residents than smaller communities and we also believe in the long term, with the very low rate of development of that is ongoing. We believe these combination assets will face a limited additional competition for at least three to four years with very strong pricing power.

So, in the short run, we are dedicated to continuing to enhance our liquidity, maintain our low leverage and dispose of non-core assets. At the same time, we are working to strengthen all of our capabilities and we have been taking advantage of these troubled times to add new, experienced personnel in order to strengthen every part of our business. There is a tremendous talent pool available that would only enhance our capabilities.

Eventually and perhaps a bit sooner than many expect the markets will reopen. HCN will be very well positioned to execute on the well thought out investment programs at that time and with that I’ll turn over the presentation to Scott Estes, our CFO, to discuss financial and portfolio matters. Scott.

Scott Estes

Thanks, George. Good morning everybody. I think my main message today is that the portfolio and financial results continue to perform inline with our expectations and that we’re up to a nice start to the year.

Thus far in 2009, we successfully raised over $400 million in capital through a combination of equity, secured debt and asset sales. We’ve invested $174 million, we lowered our March 31, leverage below 39% debt to un-depreciated book capitalization. We’ve retired $22 million of near term debt maturities and are maintaining our quarterly cash dividend of $0.68 per share.

As a result of adding both the $133 million of secured debt raised in April and another $200 million to $300 million of secured debt later this year to our guidance. We’ve lowered our normalized FFO estimate by $0.10 per share. More importantly, however, the liquidity provided by this attractively priced debt plus additional asset sales through the rest of the year should provide us with adequate liquidity into the middle of 2012.

Turning now to the details of first quarter performance, we completed a $130 million of net investments during the quarter. Gross investment activity of $174 million was primarily ongoing development funding with some other minor amounts for capital improvements and loans.

Dispositions of $44 million related to two specialty care facilities and one small freestanding assisted living facilities generating $17 million of gains on sales during the quarter. Regarding our portfolio, I believe it’s generally performing as anticipated in today’s more challenging environment.

In our senior housing, skilled nursing and specialty care portfolio, same-store revenue increased 2.5% in the first quarter versus last year. These operators generated strong payment coverage of 1.97 times. As the lack of CTI based rate increases potentially impact performance through the remainder of the year. We do expect the same-store revenue growth rate in this portion of the portfolio will average 1% to 2% for the full year.

Our core medical office portfolio, which excludes assets held for sale, also performed inline with expectations. During the quarter, we generated $21.4 million in NOI, had a tenant retention rate of 72% and ended with occupancy of 90.2%. We continue to project that our core MOB portfolio will generate NOI of approximately $85 million for 2009, down about 1% versus last year.

Our MOB portfolio did see one potential benefit of the tougher economy in the first quarter as both new tenants and renewals signed leases that were roughly two years longer than our budget. More specifically, during the quarter new tenants signed leases with terms in excess of seven years, while renewal tenants signed leases with terms of over five years.

We’re also seeing strong new leasing activity, as our pipeline has an additional 25,000 square feet under letters of intent, plus we had another 51 active term sheets outstanding, totaling over 200,000 square feet of space. As a result of our solid leasing expectations, we currently estimate that our occupancy in our core MOB portfolio will finish 2009 above 91%.

Next, I’d like to spend a little more time. This quarter highlighting our senior housing and long term care performance, including some specific comments on our entrance fee communities. First in our senior housing and long term care portfolio, our independent living portfolio continued to see some occupancy pressure in the fourth quarter, declining about 80 to 90 basis points sequentially.

However, it’s important to point out; our same-store occupancy at 91% continues to compare favorably with the NIC industry average of 90%. Our stable independent living portfolio payment coverage declined by three basis points, but remains solid at 1.29 times.

In assisted living, our stable and same-store occupancy saw an increase of about 40 basis points sequentially to 89% and continue to generate solid stable portfolio payment coverage of 1.56 times and in our skilled nursing portfolio occupancy also remained flat at the 84% level, while stable coverage remained very strong at 2.25 times.

Turning now to our entrance fee communities, most of our entrance fee projects just continue to struggle somewhat with sales, due to the slow economy. However, as George mentioned, we did see a slight up tick in activity during the first quarter. As of March 31, all our entrance fee operators were current on their rental payments.

I think it’s also important to remember that about 40% of the unit mix on these campuses is rental in nature as opposed to buy in and that these rental units have generally continued to fill according to budget. We’ve been very proactive in monitoring this portion of our portfolio and also we’re reviewing performance data on our entrance fee communities on a weekly basis.

Over the past two months, we’ve been on site at every one of these communities and believe they’re among the best positioned in their respective markets and also, as George mentioned, I do think it’s very important that we feel that our entrance fee communities that are likely to encounter no new competition for at least three to four years due to the lack of new construction currently nationwide.

At the end of April, currently 10 of our 15 total entrance fee communities were opened and over the last several months, we have seen a nice number of move-ins at several facilities, which have recently opened. For these operators, we hope to see a continuation of this positive momentum over the next 12 to 18 months as the initial move-in periods of sites and we work towards stabilizing the campuses.

Now before moving onto financial results, I’d like to also highlight our continued progress toward moving assets at our un-stabilized or fill up portfolio. Last year in 2008, we stabilized a total of 17 properties, another six properties stabilized during the first quarter of 2009 and we’re currently projecting four additional stabilizations during the second quarter.

Of note, we had one combination assisted living and dementia property that stabilized in the first quarter that was 100% pre-sold and essentially moved directly from under construction to stable status. I think we point this out just that it speaks not only to the strength of demand for senior housing in certain markets, but also the importance of picking the right operators, who know their respective business models.

Turning to financial results, first quarter normalized FFO of $0.81 per share increased 3% versus previous year. While normalized FAD of $0.76 per share represented 1% increase. I would remind everyone that first quarter normalized numbers include the impact of $2.9 million in accelerated expensing of stock and options for certain officers and directors, but excludes the $3.9 million associated with the departure of Ray Braun. Both of these items are included in our $17.4 million of total G&A this quarter, resulting in a run rate of approximately $10.5 million to $11 million for the remainder of the year.

Regarding our dividends, we recently declared the 152 consecutive quarterly cash dividend for the quarter ended March 31, of $0.68 per share. As I mentioned last quarter, our Board of Directors approved a 2009 quarterly cash dividend rate of this $0.68 per share or $2.72 annually beginning with this payment.

Our capital activity year-to-date really has been very positive. On April 7, we closed $133 million of debt financing with Freddie Mac secured by 12 senior housing properties. The 10 year debt matures on April of 2019 with an attractive 6.1% interest rate. We were pleased to work with both Freddie Mac and KeyBanc on this transaction and believe this highlights the strength of the company and our ability to access multiple markets at reasonable rates.

In terms of equity, in addition to our $211 million January equity offering, we issued 376,000 shares under our thrift program, generating $12.5 million and we chose not to issue any new shares under our equity shelf program during the quarter.

We also did take the opportunity to retire $22 million in future debt maturities during the quarter, which included $12 million of our 2012 senior notes, $5 million of our 2026 convertible debt and $5 million of our 2027 convertible debt at a blended yield to maturity just under 10% and we recorded a gain of about $2 million. We’ll continue to evaluate opportunities to buyback near term debt maturities when feasible.

Turning to liquidity, pro forma for our April secured debt issuance, we had $967 million in available cash and line of credit availability, compared to $593 million in unfunded development and $53 million in debt maturity through year end 2010. This results in the cash surplus of $321 million.

To further enhance our liquidity, we continued to pursue additional tranches of secured debt. Although the terms have not yet been determined, we’re modeling additional proceeds of $200 million to $300 million of secured debt in the second half of the year at approximate 6% to 6.5% rates.

Obviously, terms are subject to the final properties selected, debt structure and underwriting, but we did feel that it was important to include it in our current forecast. Combining this debt with additional asset sales in our forecast through the remainder of the year provides sufficient liquidity to meet all capital obligations through the middle of 2012.

Our credit profile remains very strong with debt to un-depreciated book capitalization at only 38.8% at the end of the quarter and interest in fixed charge coverage of 4.1 times and 3.4 times, respectively. Our secured debt stood at 7% of total assets at the end of the quarter and will increase to 9% pro forma for the secured debt transaction closed in April.

We estimate secured debt could increase to 14% of total assets, if we did add as much as $300 million of additional secured debt later this year. We do remain comfortable with these levels, however and I would point out that we discussed our capital plan in detail with each of the rating agencies as well.

Finally, we have updated our normalized FFO and FAD guidance, primarily to reflect both the recently executed and pending secured debt transactions which were not in our previous public forecast.

As a result, we now expect to report normalized FFO in a range of $3.10 to $3.20 per diluted share, normalized FAD in the range of $2.96 to $3.06 per diluted share. Net income available to common stockholders has been increased to $1.70 to $1.80 per diluted share from $1.59 to $1.69 as detailed in our press release.

Now, with that my report has concluded and I’ll turn it back to you, George.

George Chapman

Thank you, Scott. We now will open for questions

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from Karin Ford - Keybanc Capital.

Karin Ford - Keybanc Capital

Question first just on the healthier tenants. Have you been hearing any issues with coverages or anything on the health of your particular tenants or are you hearing anything within your operators on the development pipeline that causes you any concern?

George Chapman

Well, for usual, there are always operators who are watching more carefully than others. One operator that we’ve been talking to you about recently, we took away assets from that operator and moved it to a two different operators very successfully, I think, constructively and another operator who has been paying us is relatively small operator, went through bankruptcy and we recently received a bid from a substitute operator and we’ve done that pretty much unscathed.

Karin, as you know, we’ve been reporting that sales in the buy in CCRCs have been moving slower than we would like, but frankly they’ve picked up a bit at the first quarter, as Scott and I each indicated. Again, we have some cautious optimism, but frankly despite the market and despite the economy; we’re finding that our operators are holding in there quite well, a modest increase in ALFA or assisted living occupancy, modest decline in independent living.

We’re thinking that our operators are holding up quite well and as we look ahead for two to three, four years, with the lack of development we feel that we’re going to be in very good shape. Scott, did you want to add anything?

Scott Estes

No, I think it’s a good summary.

Karin Ford - Keybanc Capital

Next question just on asset sales, can you just talk about pricing trends you are seeing there and just update us on the status of the MOB portfolio for sale?

Scott Estes

Actually, in general our asset sales program overall this year is progressing very well. I think we obviously made some nice headway to start off the year at a price that was able to generate some gains as well. I think, as you think for towards the rest of the year in terms of the senior housing portfolio component and I’ll pass it on to John Thomas to talk about the medical office disposition progress.

We are still very comfortable that we can continue to get north of $200 million of dispositions done this year. Again, timing is probably skewed a little bit more toward the latter half of the year. We have no individual disposition in senior housing that’s more than really, $20 million or $30 million. So, again, these are smaller deals that we feel comfortable that can get generally local regional bank financing or potentially bridge to HUD and get completed.

John, maybe you comment on the success we are having on the MOB disposition front.

John Thomas

Yes, Scott. Consistent with our expectations and our plans, we are very pleased with the results first quarter of our MOB disposition activity. Jay Morgan has been leading that proportion and I’d ask him to add just a little color to that, but as Scott just mentioned, the local buyers with local financing options has been very active and positive result for us.

Jay Morgan

Yes, the specifics of the 14 we’d classified as held for sale, we have 11 either under or close to signing contracts on. Pricing is a little difficult because these assets, some of them had some occupancy challenged to more of a price per pound type of thing, but the pricing is coming inline with our expectation on the deals that we’re close to signing contracts on. As Scott and John said, local investors, some user investors, as I mentioned last quarter, and by and large, they’re leveraging local bank relationships for financing.

Karin Ford - Keybanc Capital

Just one final one, on your continuous equity program, I know you said you didn’t utilize that this quarter. Can you just talk about, whether or not you have utilized it since quarter end and what your thoughts are using it for the balance of the year?

Scott Estes

Karin, this is Scott. We have not used it at all this year. Again, I think it’s an appropriate tool to have in our toolbox. I think we will again, as with the rest of our view of equity, view it as opportunistic capital, we’re clearly price sensitive the equity shelf program in particular, is one efficient way, given that we only pay roughly a 2% discount or fee in terms of that cost of equity. So it’s pretty efficient for us, but again, now we haven’t used it yet at the current stock prices.

Operator

Your next question comes from Richard Anderson - BMO Capital Markets.

Richard Anderson - BMO Capital Markets

When you talk about your cash surplus number of $321 million, do the math for me, $966 million on cash outstanding on your line. Is that you have $586 million unfunded development? Is that the number you are using?

Scott Estes

Yes. I think, to get to the cash availability, we have $815 million available on our line. We have about $19 million of cash on our balance sheet and we are including the $133 million of unsecured debt. So that gets to the $967 million of capital and we have remaining development funding really all the way through 2011, if you look there at $593 million, plus some minor $50 million to $65 million or so of secured debt maturing over that period as well.

Richard Anderson - BMO Capital Markets

If you would have sort of peel back the onion I guess, right now on a year-over-year basis you’re looking at a negative FFO growth, but there’s been a lot of activity to create that. If you would have sort of pullout all the financing activities that you’ve done, are we looking at sort of apples-to-apples FFO for 2009 as it sort of like a mid single digit type of number? I’m trying to get a sense of what the impact of all the financing activity is, in the aggregate to the growth rate?

Scott Estes

Well, I clearly think the financing activity is the vast majority of the impact of the year-over-year decline as we ended. We start to think if we had more of a standalone growth rate. I would say that earnings this year are slightly impacted by our expectations in the senior housing, long term care and specialty care component of the portfolio. We are assuming, again, the lack of CPI growth this year.

So, you’re probably seeing a little bit less internal growth, our 1% to 2% forecast in that portion of the portfolio. Again, MOB is about at 25% or roughly flat, maybe down a percent as we indicated in terms of NOI this year. So, I guess as looking more toward next year, one, we have the ability to catch up a lot of those potential, a lot of CPI increases this year to the extent, if CPI does turn more positive next year.

I would think, generally, the run rate in concept is probably longer term, still the 2% to 4% internal growth plus any net incremental acquisitions that we would hopefully be making accretive acquisitions.

Richard Anderson - BMO Capital Markets

This question on the CCRCs and the 40%, which is rental and the 60%, which is buy-in, those numbers that you gave us? I just don’t know this, but mechanically, do the residents on the 60% side, the buy-in model, what is their claim on the asset? I’m just trying to understand how that works. Could you give us some color on that?

George Chapman

The 60% have access to the health care services, the higher acuity services, but they would have to at the appropriate time, pay for those services. I mean this is as you know Rich, from years ago, the biggest problem with CCRCs, 25, 30 years ago was that there was one price for everything, every service and that’s not the case right now; they’re definitely unbundled and with space available it would be a natural move into the health care component.

Richard Anderson - BMO Capital Markets

So what do you prefer? Do you prefer there to be a greater degree of rental, I assume?

George Chapman

Well, I don’t think so, necessarily. Right now, with the CCRCs that we are seeing and that we think that the customer is going to demand. All of these have a great deal of common space and amenities and grounds and to make those work as well as they can, it means that a buy in has to take place.

With the service fee income they are after taking care of the month-to-month kind of return. So, generally you would see a rental CCRC being somewhat smaller, perhaps more normal nice, but without some of the amenities and the common space that’s for each, different customer to decide, what the price point is and what amenities he or she wants.

Scott Estes

This is Scott. Another thing I think we find that’s interesting or important is that a lot of the perspective residents like the concept of ownership. I think it’s important for them to feel like they own the community or their respective unit within the community. George didn’t point out; I guess I don’t know if your original question was about the re-fundability of that entrance fee.

Generally, the resident or the resident’s estate would receive roughly 60% to 90% of their entrance fee back upon leaving the community or passing away.

Richard Anderson - BMO Capital Markets

You may have touched on this a little bit in your commentary, but you show a sort of an elevated level of expenses in your ILF, CCRC portfolio data. Can you just sort of characterize what that is? It’s sort of bid into your coverages.

Scott Estes

I think if you look at the expense per occupied unit there, it’s probably most impacted in occupancy was down a little bit year-over-year and if you look, you generally a large portion of fixed expenses in running communities like that. So, when you have occupancy decline slightly, as it did, you have a little bit higher expenses on a percentage basis.

Operator

Your next question comes from Jerry Doctrow - Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

I wanted to just come back and ask maybe a little bit broader question about access to capital. Obviously, you’ve gone through the numbers and you say with using secured debt and asset sales, you’ve got plenty of money to fund development pipeline and a chunk left over.

Obviously, a number of REITs both inside health care and outside health care have decided to raise capital equity and in some cases unsecured debt and partly that’s being done for defensive reasons; partly it’s being done, because people think there may be more opportunities.

I guess I was sort of just curious, given that debt costs are coming down, given that credit lines, as they get renewed, people will think they’re going to be more expensive, maybe smaller.

How are you thinking about that? I mean I assume you don’t want to run the line the whole way up to the end, even though that’s kind of what the math implies. So how are you thinking more broadly about capital markets now? What would be those things you might need to do or might prompt you to raise capital? Are there any opportunities out there that might prompt you to raise capital?

George Chapman

A very general question Jerry; one, we do not have to raise capital at the moment, as we’ve said. We do not have a leverage issue and currently we have adequate liquidity. We are seeing some opportunities in the acute care side, as well as the senior housing side and there could come a time when we would look seriously at putting some money to use for an accretive acquisition, but we haven’t been terribly eager to go out and either raise money on an unsecured note deal at a very high cost, although pricing is coming in, as you suggest.

Moreover, we think that at $33, $34 that there’s a pretty good chance that we can do better in the next quarter or two, we’re certainly hopeful of that. We would take advantage of it at a certain price, but this is still a time for caution. It is a time to perhaps take opportunistic capital, when the pricing is a touch better, as we’ve done with the secured side and we’ll continue to do that in the summer. Mike Crabtree is running that program.

We’re hoping that equity and unsecured debt will free up and we’ll take advantage of it when we think the pricing is appropriate. Just to finish the thought, we are all over the country in terms of forming new relationships and solidifying existing relationships with the best operators in senior housing in the medical facility side and we will have more than ample opportunities to put money to work once it’s priced appropriately.

Jerry Doctrow - Stifel Nicolaus

Just on the pricing, I think you did like an 11.5% mortgage, if I remember seeing that correctly. So, where would you see pricing on new stuff you might be doing today that would get you interested?

George Chapman

That would probably, to a certain extent depend on the asset class. We are right now passing on the pool of pretty good medical office building assets that are probably in AIDS, but 8% level and part of that is our assessment of the overall quality. It’s always going to be dependent on a particular portfolio. We’re seeing some acute care assets that could be done at 9.5% up to about 11%. Some senior housing that is 9.5%, 10% and we are thinking, what our ability to raise secured debt and with our equity starting to move up a little bit that might become interesting at the right time with the right operator with the right quality asset.

Jerry Doctrow - Stifel Nicolaus

You feel comfortable enough that you could deploy some capital even now without basically coming back to the markets for anything beyond what you’ve already outlined?

George Chapman

We said that, we have $300 million right now of so-called surplus capital, but 2011, ‘12 and ‘13 sneak up on you before it. I think, if we get the additional agency paper done, we would feel better about putting out some modest level, making some modest levels of investment.

Operator

Your next question comes from Dave AuBuchon - Robert Baird.

Dave AuBuchon - Robert Baird

I had a question about your medical office portfolio. Scott, I think you gave an outline what you expect the total amount of NOI to be for the year, but can you address your expectations for the same store growth in that portfolio? Because year-over-year it looks like the NOI declined just a tad under 8%.0x01 graphic

John Thomas

This is John Thomas. Most of the same-store that negative decline at same-store was attributable to a couple of assets and one in particular. We have already replaced the major portion of that space with a new tenant at very attractive rates and also that tenant is an AFC space, which is attracting more of the physician partners from that AFC to the building.

So, we’re very comfortable with where that’s going to be at the end of the year and the AFC lease is executed at less of the total space that expired at the end of last year, but at a very attractive rate and also it’s attracting physicians back to the building. So, it’s a good long term asset for us and will be cleaned up this year.

Dave AuBuchon - Robert Baird

So, ex-those two assets, the same-store growth would have been much better?

John Thomas

Yes. It’s attributable primarily to that space and again, some small tenancies in a couple of locations. Our core properties and our leasing activity total for the year, we’re very pleased about that.

For our total leasing budget, including month-to-month, we’re already in excess of 64% of our branded target amount and both the renewals and new leasing, we’re targeting about 200,000 feet first in budget, and we’ve got over 500,000 feet in either term sheets, LOI’s or active lease negotiations. The numbers that Scott referenced at the beginning was focused on our renewals, which we are well ahead of pace for annual targets.

Dave AuBuchon - Robert Baird

General rent growth you expect it to still be positive across the board?

John Thomas

Yes, again this economy, it’s been tough, but we did have in our core properties a 3% increase in our core revenue, slight I guess a 1% overall decline is still inline with the expectation for the year over the total portfolio. Again, we’re focusing a lot of efforts on the expense side as well and trying to get that down inline with both tenant expectations and our own expectations.

Dave AuBuchon - Robert Baird

Can you review the debt ratios relative to your covenants, assuming you execute the secured financing, I just didn’t catch them?

Scott Estes

Sure, debt to underappreciated book, debt to book cap in the covenant is 42.9% at the end of the quarter and if you add the $133 million of secured debt that we completed subsequent to the quarter, I think it goes up about 1.1%. Again, pro forma for as much as the $300 million of additional secured debt, it would again move, I think another 2% to 2.5% from there, but again, that assumes all else being equal as well.

Dave AuBuchon - Robert Baird

How much more active should we expect you to be regarding any debt repurchasing?

Scott Estes

I think we’ll definitely look at it. It’s really just a sense of what’s going on in pricing in the market and, as you would expect, we would have more of a focus and emphasis on the near-term maturities would be more appealing to us, and really just watching those closely, as you would expect.

Dave AuBuchon - Robert Baird

But assuming you are seeing a bigger discount on the exchangeable notes?

Scott Estes

At the right price, sure, we would be interested. Are you talking about the convertible debt?

Dave AuBuchon - Robert Baird

Right, exactly.

Scott Estes

Yes, those are in our portable in 2011 and 2012.

Dave AuBuchon - Robert Baird

But I’m assuming that you are seeing a bigger discount there relative to your other unsecured paper that’s trading in the market?

Scott Estes

Well, actually no. As of yesterday, I looked our convertible notes are trading pretty well. If you look, the two issues are roughly 91 which I think north of 94% or 95% of par and the other was 97%, 98% or actually, unlike a lot of our REIT peers at least within on the map in terms of relative price versus our conversion price.

One was, I think, $47.81 at issuance and the other was $50. So in the mid-30s, there is still at least some value to the equity component of those securities.

Operator

Your next question comes from Robert Mains - Morgan Keegan.

Robert Mains - Morgan Keegan

I just got a couple of portfolio questions for you Scott. First one, I think you said that you sold two specialty care facilities. The number of facilities went down by three. What happened to the other one?

Scott Estes

We reclassified one of the assets out of that portfolio based on unit mix. It was a combined LTAC SNF that really had a lot more SNF beds and moved to a SNF in the quarter.

Robert Mains - Morgan Keegan

Then, this may actually answer the question and I know we’re talking real small numbers here. But I noticed in the SNF portfolio, sequentially you had occupancy and Q mix were both up, coverage was down just a little bit. What’s that a reflection of?

Scott Estes

If anything, if I’m looking at least on a year-over-year basis; there’s a slight decline in margins. It’s such a small number, Rob it could be balances and what’s going on with individual assets that make up a larger writing. I’m not sure I know that right off the top of my head. It’s only, what 1 basis point, so.

Robert Mains - Morgan Keegan

So it’s kind of rounding-error type of stuff, more than anything else?

Scott Estes

If there’s anything, I’ll give you a call.

Operator

Your next question comes from Omotayo Okusanya – UBS.

Omotayo Okusanya - UBS

Could you just talk a little bit about this development pipeline? I noticed that the development yields for your combination rentals being down slightly from last quarter. Could you also talk about for development projects that are going to be going live very soon, the operators that have to lease up those facilities, kind of what they are seeing at this point?

Scott Estes

I’ll first take the slight decline in our combination rentals yields. Last quarter, we were projecting an average 8.4% initial yield on those assets under development and now we’re only slightly lower at 8.0% and the reason, there were two conversions in the quarter of assets out of the construction portfolio at 9% initial yields.

We also had, through this transfer of operators that George referenced, 0x01 graphic

we had about a 100 to 125 basis point reduction in initial yield forecast as a part of that transition. So, those two factors were the slight decline only in the combination rental initial yield projections.

Omotayo Okusanya - UBS

What about in regards to the operators that are taking up lease up on the facilities? What they are seeing at this point? Is lease up kind of going according to their schedule? Is it a little bit slower than they were expecting?

Scott Estes

Our fill up portfolio or un-stabilized portfolio is currently about $817 million, it is down to 13.8% of the total portfolio from a little over 14% last quarter. I’d always point out that the development portfolio is very diverse with no individual component of it more than, really $300 million or so of the total committed balance.

I think clearly, as I mentioned in the call, we saw good movement of getting assets out of that component of the portfolio with six assets stabilizing in the quarter and another four projected to stabilize. Really, the only other thing I guess I would point out is, on average, we saw, I think roughly, my numbers are four to six units per facility were absorbed during the quarter, leased in the fill up portfolio.

So, as I think about how our assets moved from development into the fill up phase. I still think we’re optimistic and really, as we mentioned, having the right operator in the right market is the way we look at that part of the portfolio as being the most important factor.

Omotayo Okusanya - UBS

Last question; your hospital portfolio, which is about 10% of your overall portfolio, could you give us a better sense of the mix between general and acute care hospitals, LTACs and inpatient rehab facilities?

Scott Estes

If you look at that breakdown again, we have 28 properties. LTACs are 15 properties. It’s about $200 million investment balance. So, roughly only 3% of the total company, total committed balance is $6.5 billion. I think I’d point out there is that our stable coverage for that portion of the portfolio is about two times, as of trailing 12 months ended 4Q.

Inpatient rehab, there has been some rhetoric, obviously about all the various health care sectors of late and inpatient rehab we have five properties. It’s about $136 million investment balance or only 2% of the total portfolio. They’re covering, after management fees fairly well as well, I think 1.6 times. Again, acute care facilities we really have about five facilities in the portfolio, some acute care, orthopedic facilities, neuro, ortho type hospitals.

Omotayo Okusanya - UBS

Was the acute care total investment dollars on the coverage ratio?

Scott Estes

I don’t have the coverage the investment balance. I figured we’d be more focusing on the reimbursement stuff. It’s a little under $200 million; $190 million I believe is our acute care balance.

Operator

Your final question comes from Jim Sullivan - Green Street Advisors.

Jim Sullivan - Green Street Advisors

Scott, you talked about a reduction in the initial yield on the property that transferred from the original operator to the replacement operator on the pretty developments. What extent were those projects unusual or perhaps an aberration? Or might you experience something similar on the pretty material amount of development you have coming up for completion later this year and into ‘10?

Scott Estes

I’d first comment that we had been watching those assets for awhile and as George mentioned, you do a lot of work to try to transition assets to a different operator. Again, the transition was two assets that were under development and four assets that were in fill-up that were transitioned to a separate operator.

The operator that we did get to take the development properties we’re very excited to have in the portfolio; it’s someone we’ve known for a long time and have a 20 plus year of history in the senior housing business and really maybe, George, I don’t know if he’d comment on any of the negotiation aspects of what the slight reduction and initial yield through that transition.

George Chapman

Well, first of all, on the four that were moved, there is very little reduction and we’ll make up for that reduction in later years. So that’s more of the standard, Jim. We’ve based upon our many years of experience. The other ones were more troublesome and I don’t know whether it was just the particular community or that our old operator did not do a good enough job of preparing before they opened.

But for whatever reason, we brought in another operator and needed a reduction and I think the only aberrational aspect to it is, that usually doesn’t happen to us and we had to take a bit of a reduction and that’s an oddity in our experience, but we are fine with them because they’re very good operators and the care will be very good and it’s certainly something we can handle very easily.

Jim Sullivan - Green Street Advisors

When you say, you’re accepting a reduction initially, but you’ll make it up in later years, so you are reducing the initial rent, but you are getting a higher growth rate in that rent agreement?

George Chapman

With the four, there is a chance that we will make up for it in the other two, but we’re not necessarily counting on it.

Jim Sullivan - Green Street Advisors

You’ve talked qualitatively about your entrance fee move-ins and the pace of move-ins, and we’re especially concerned about the entrance fee communities that are coming towards completion in markets that have experienced the most stress in terms of the traditional housing market.

You’ve talked qualitatively, I think you said last quarter that things were slower than you expected. You said on this call that things picked up a bit in the first quarter. Can you quantify at all those qualitative comments with respect to the entrance fee move-ins and the pace that you’re seeing?

George Chapman

Let me give you an aggregate couple numbers to give you a feel for it. But it’s clear that; we have one case where the sales are slower than the others. Our largest operator, frankly, in the Southeast is ahead of his projections, which really helps us quite a bit. He has the greatest number.

As you look at the aggregate move-ins and presales for our 10 communities which are open, those totaled 67 through the end of April versus our budget of 71. So, we are running a little behind, but in the aggregate we are starting to feel better, pretty good, about where we are right now and that’s a result of a lot of hard work and follow-up and really working the traffic.

So, I think we are seeing some pretty good signs and that isn’t to say, though, that there aren’t going to be one or two that keep us preoccupied. Scott, did you want to add anything?

Scott Estes

No, I think that’s a good perspective in aggregate terms of how we are doing on presales and move-ins even that’s all the way through the end of April.

Jim Sullivan - Green Street Advisors

Then switching gears, Scott, last quarter you disclosed that $73 million of your total loans are now on non-accrual. That struck me as a pretty high number in an absolute sense and a very high number as a percentage of your total loans. Can you talk about the nature of the loans that are currently on non-accrual and then with respect to the non-accrual assets, what you’re thinking in terms of your actual loan loss reserve?

Scott Estes

Sure, the loans on non-accrual were $72.7 million last quarter. There were no additions to that number in the first quarter. Again, as we think about it, one way I looked at it, if you look at our aggregate loan portfolio, excluding the loans that are on non-accrual, we are still generating about an 8.5% to 9% return on our aggregate loan portfolio.

I think we’ve been pretty conservative, historically from a recognition perspective. As I look back to our history of loans on non-accrual, the last time we had a little bit of a higher number was in 2004, where we had, I think it was as high as $35 million to $36 million of aggregate loans on non-accrual at that point. That was even a bit of a higher percentage of the portfolio at that time and when you look at that pool of loans, we had only $55,000 of write-offs from that portfolio since 2004.

So, I think we try to be conservative from a recognition perspective. As it relates to our reserve, we look at the aggregate pool of loans that were determine to be at risk every quarter and again make any adjustments as necessary to move the aggregate reserve to a level we deem adequate based on a collateral analysis.

Generally speaking, smaller operators, very small percentage of the portfolio, I think are anywhere near the top 20 or even 30 or so of our operators. It’s more skewed toward the independent living component of our business.

Jim Sullivan - Green Street Advisors

Finally, is Health Care REIT a participant in the newly cast Brookdale line of credit?

George Chapman

I didn’t hear that, Jim. Would you repeat that?

Jim Sullivan - Green Street Advisors

Yes, you guys are a participant. Brookdale REIT did its line of credit. Are you guys are participating that?

George Chapman

Yes, we are.

Jim Sullivan - Green Street Advisors

Can you help me understand or can you tell us how much?

George Chapman

It’s relatively small and it was done in conjunction with two other financial partners of Brookdale’s. I think the message I’d like to give to the street is that it shows our confidence in Bill Sheriff and what he’s doing and we’re happy to be in it.

Jim Sullivan - Green Street Advisors

Why did Brookdale need to go outside of its traditional sources of line of credit capital, i.e. the banks and have to reach out to you as a participant?

George Chapman

I think that they had a number in mind. I also believe that we sort of know the answer why people have had to go outside of traditional sources. The banks have not been fun to work with lately and anybody who has had to deal with liquidity issues or has had to deal with some of the housing issues impacting some of the coverage’s knows that it’s not at all atypical.

Frankly, I think that Bill and Brookdale should be complimented on getting a bank deal done in these times. By the way, he and his team are doing a great job in terms of operations. So, we’re happy to be in it.

Operator

At this time there are no further questions. Mr. Chapman, you may proceed with your closing remarks.

George Chapman

I have no closing remarks, but we would like to thank all of you for your participation. Scott and the team will be available for any follow-up questions. Thank you.

Operator

Thank you all for participating in today’s Health Care REIT conference call. You may now disconnect.

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Source: Health Care REIT Inc. Q1 2009 Earnings Call Transcript
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