Good morning, ladies and gentlemen and welcome to the Health Care REIT first quarter 2010 earnings conference call. My name is Tina and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As reminder, this conference is being recorded for replay purposes.
Now, I would like to turn the call over to Mr. Jim Bowe, Vice President of Communications for Health Care REIT. Please go ahead, sir.
Thank you, Tina. Good morning, everyone and thank you for joining us today for Health Care REIT's first quarter 2010 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 maybe accessed through the company's website as well. Certain statements made during this conference call maybe 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 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.
Thank you, Jim. This morning I will discuss our current portfolio and its performance, our success in positioning the portfolio to meet the needs of our customers going forward as well as the progress with our entrance fee communities. I will then focus on the growth platform that we have built. Our portfolio is strong and diverse with coverages of about two to one and our top five and 10 operators comprise only 25% and 37% of our portfolio respectively. More importantly in medical facilities that is hospital's medical office buildings and life science buildings have become a very significant part of the portfolio currently comprising 40%.
We are establishing important relationships with health systems resulting in investments in modern customer-centric hospitals and medical office buildings and our life sciences and investments have added another property type that enhances our diversification as well as our offerings to health systems. Clearly these investments provide meaningful portfolio diversification as well as investment opportunity. We have acquired the Windrose and Rendina MOBs several years ago. We also acquired property management capabilities and we made it clear at that time that we will produce a very strong MOB portfolio and property management team. And we are very pleased with our progress in doing so. As we have culled through the MOB portfolio, eliminating smaller unaffiliated MOBs while at the same time investing in larger customer-friendly MOBs affiliated with excellent health systems.
With our recent Aurora acquisition, our MOB occupancy now stands at 93%. The percentage of on-campus and affiliated MOBs was up to 80% and heading toward our near term goal of 90%. The average size of our MOB portfolio has increased from 39,000 square feet in 2006 to 52,000 square feet today and is continuing to increase. Generally we believe that MOBs will be even more critical elements in the health care sectors as health systems extend their reach and branding efforts through these facilities and also provide more health services such as outpatient surgery and testing. At that same time the facilities are better designed and focused on the customer. We believe that MOBs are generally favored by those healthcare reform that John will discuss later and have benefited from those dramatic shift to outpatient services.
I might point out before leaving this topic as well that Mike noticed property management team has added key personal and is hitting on all cylinders. So we thank him and all of them for their efforts. In the senior housing sector, we are successful moving our facility mix from freestanding facilities to facilities that offer multiple services and place more emphasis on wellness. Our freestanding SNIPs skilled nursing facilities now comprise only 15.5% of the portfolio and could be as well as 12 to 13% by year end. Generally we believe we have a portfolio that is comprised of best-in-class assets that give us great confidence in future performance.
Now that we will continue to position our portfolio to minimize the possibility of functional obsolescence and maximize performance and quality care. Let me say a few words about independent living facilities and CCRCs. It is clear at least on our portfolio and I think well supported nationally that occupancies and our independent living facilities are bottoming out and while CCRC fillip and sales are more complex, we are certainly seeing better volumes and fillips as well and with minimal development activity, we believe the favorable demand supply relationship should produce significant value in this space over the next several year.
Scott Estes will share some additional information regarding our CCRC progress later in his remarks. But I would say that we are very pleased with our progress as an example our largest CCRC operator senior living communities has entrance fee and rental occupancies of 55% and 82% respectively inclusive of the newest CCRC that opened a month or so ago. Those operators being successful even in these tough markets because it pays close attention to every aspect of its business including running at terrific wellness program and a noted dementia program.
I should note with endless CCRC space, there has been a change in our operator base. Relating to the acquisition of (inaudible) senior living communities and this was a beneficial transaction for all of us. As it allowed our largest operator to expand the Indus region and for Banyan [ph] it permitted its founder and principal to begin his retirement process, but continue to provide ongoing support and consulting for a period of time.
We did incur an expense of $5 million that includes a balance of the development fees over to Banyan [ph] and all these termination fee paid for the value equated by Banyan [ph] as well as to facilitate the transaction. Let me turn to our growth platforms. In 2008 and 2009 when the economy was in some difficulty and when the capital markets were troublesome, we enhanced our capabilities through key hires and re-possession our structure and team for our competitive advantage.
In 2009 we raised approximately $700 million of equity and $260 million of secured debt and as we enter 2010 we further improved our liquidity and lengthened our debt maturity through successful offerings of convertible debt and unsecured notes. We are quite pleased with our investment results year to date of $700 million. And as a result of this great start and our optimism regarding our ability to close additional attractive investments, we have increased the high end of our acquisition guidance by $200 million. We believe that our full spectrum investment platform, property management development capabilities and relationship approach to investing provide tremendous competitive advantages for Health Care REIT. The ability to pursue and capture investments across the whole spectrum does contribute to portfolio diversification, a full year focus for us. yet the other clear benefit is the expanded investment opportunity. By being capable of investing responsibly in each segment in each sector, we can select the best risk reward opportunities as markets change. So we remain enthusiastic about our ability to capture excellent new investments, driving strong earnings growth going forward.
Now at this time I will turn to John Thomas, Head of our Medical Facilities Group to comment on healthcare reform and give you an update on our life sciences investments and in turn John will introduce Scott Estes, our CFO for a financial and portfolio review. John?
Thank you, George. Before I begin, we would like to recognize the dedicated members of the health care team located in international office. As many of you know the region has been devastated over the weekend by flooding. While our office and MOBs in the area are all fine, we have been able to and we both have been able to account all of our associates and they are fine. Our thoughts and prayers go out to them and the people of Nashville as they work through their painful losses and recovery. (Inaudible) healthcare reforms, the healthcare reform margin historically been we've been following the legislated discussions closely for over a year to access the information from a number of Washington insiders including members of Congress on both sides of the aisle, (inaudible) consultants and a close of Health Care REIT former Secretary of Health and Human Services, Tommy Thompson. We believe the new laws will have a favorable impact in our portfolio and opportunities for growth where we all agree with the years before you know with the laws of expense and exactly who has been affected most.
Perhaps the best thing about the legislation for now is certainty and a move from debate toward implementation. I would like to take a few minutes to discuss specific implications on our portfolio. Medical office buildings in hospitals, we anticipate a continued evolution of medical office space away from office buildings towards larger ambulatory care centers. But it's not clear that there's will necessarily be a demand for more total office space. While Congress and the administration estimates $30 million more insured over the next five or 10 years, the number of positions is not changing.
With the current and growing charge of divisions, hospitals will continue to recruit available physicians aggressively while striving to lower the cost of care continuum and thus more and more physicians will either be employed by hospitals or large groups that will contract the hospital systems. This should benefit Health Care REIT and reinforce our business strategy of aligning with larger academic medical centers and other hospital systems aggressively recruiting physicians.
The loss reimbursement changes emphasize the relative performance and bundling demonstrations will strive to eliminate today's solidify care that's forcing greater cognitive care between providers and increased transparency. We believe this will lead to more comprehensive and more efficient out-patient and in-patient facilities aligned with other specialized facilities for the necessary patient care. Generally key care hospitals will work even harder to transition patients out of the general acute setting as quickly as possible and this will benefit our host to acute facilities particularly in patient rehab facilities and long-term acute care hospitals.
Overtime is slight neutral where payment becomes more prevalent, we believe skilled nursing facilities will also become an even more integral part of the hospital as opposed to acute care settings. In the near term, the law directly benefits the large [Elpac] operators by continuing the extension of the [Elpac] moratorium for any new [Elpac] development until after December 31, 2011. Alpha, the [Elpac] industry trade group believes this may be the last expansion.
There trends will have a significant impact on half the alignment strategies with physicians, in patient rehab, long-term acute care and skilled nursing facilities in and near the hospital campus. The hospital will control the bundle payment and have responsibility for both the financial and close result of care all of which is driving health care real estate development led by forward taking health system.
For skilled nursing, the market basket will undergo productivity adjustments beginning in fiscal year 2012 and running through 2019. While negative, we anticipate these adjustments have a minimal impact on our lease coverage as our skilled nursing portfolio has as strong coverage before management fees of 3.4 to one times.
In a positive development, the RevPAR payment system implement has been deluded to a fiscal 2012.
The life sciences, the load of benefit near and long-term life science investments. The industry agreed to $80 billion in currency over 10 years and reimbursement but the (inaudible) correspond with a reduction in the Donut Hole in Medicare Part D aforementioned that part D is an effective and popular benefit increased long term certainty for the pharma industry. While 30 million more insurance may not lead to the demand for more immediate medical office space, Medicaid and near insurance products for the uninsured will provide prescription benefits and thus large volumes of sales.
Biologics also received a new intellectual twelve year property protection which eliminated the long running concern over these important products and that promotes new sign development and investment. Doctor reformed did not open up the market for re-importation of more priced drugs. All these factors combine to drive more long-term R&D investment despite because the new taxes on the industry. And we believe continued growth of our life sciences facilities. We continue to see opportunities to provide life-science research and clinical trial and education facilities to our academic medical center partners.
More and more hospitals are seeking up pharma to align with their researches and physicians on the campuses and we will have an excellent opportunity to acquire and develop these facilities to our new nursing growing number of health customer relationships.
In summary health care reform has significant implications for our country and the health care REIT portfolio. As we believe there will be continued demand and more opportunities for new types of healthcare facilities. You can't assess the impact of the law without also evaluating the Medicaid expansion and the ability to state budgets to fund their portion of these programs.
We will be watching those state budgets and otherwise keep well informed and evolve our portfolio accordingly. We are also monitoring the imaging powers and legislation discussions. Hospitals simply are the largest users of the utilities and the community and we will continue to assess the impact of energy legislation on our senior housing and hospital partners. We are already investing in people and solutions to help us deliver value added energy management and cost reduction strategies for our building and clients. We are charter members of the US Department of Energy Hospital Energy Alliance and have five projects under development that will qualify so at least leave a silver status consistent with our policy of building healthy and sustainable buildings. We will report on these legislative efforts and our proactive efforts to lower the energy calls of occupancy to our tender partners on future calls.
For the life sciences now I'd like to give you a brief update on our life science joint venture with Forest City. The joint venture has moved forward in a very productive manner. We have been working (inaudible) accounting and property management systems while also looking for additional facilities to pursue with our Forest City partners. We recently had our first joint venture governance meeting, we have had a very productive review of all assets included in our joint venture as well as moving forward with plan to add the seventh university part building by mid May which would create an additional Health Care REIT investment of $28.3 million. We continue to look to expand our life science investments in a measured and conservative manner but have nothing more to report at this time.
I'll now turn the call over to our Chief Financial Officer, Scott Estes and will be happy to answer any questions you may have later. Thank you.
Thanks John. Good morning everyone. As George mentioned we've been one of the most active REITs in our sector in terms of new investments. Our current portfolio performance has been steady through the economic downturn, while our liquidity, credit metrics and debt maturity schedule remain strong and put us in position to continue to grow the portfolio.
Turning to the details of the quarter, we completed $585 million of growth investments which included the acquisition of medical office building leased to Aurora healthcare and our life sciences joint venture with Forest City Enterprises. We had $33 million of dispositions and loan payouts resulting in net new investment of $552 million. We also started two excellent development projects during the quarter, the first is 153,000 square foot, 72% pre-leased, on-campus medical office building in Murrieta, California providing such services as radiation oncology, cardiology and neurosurgery. This will be the only MOB on the campus that the HCN owned hospital sponsored by Loma Linda University Medical Center. Our second project is the 52,000 square foot 100% pre-leased medical office building that the cancer center on the campus is Tallahassee Memorial Hospital in Tallahassee, Florida.
Including these new projects, we have only $193 million of unfunded development commitments and that we successfully delivered another $164 million of development during the first quarter. I'll now touch on the acquisitions which have closed or expected to close subsequent to quarter end. In April we completed two acquisitions of capital senior living totaling $85 million. This includes the previously announced $49 million portfolio consisting of five assisted living facilities in Nebraska and Iowa and then near $36 million portfolio consisting of three assisted living in dimension care facilities in Indiana. These assets are leased under a 15 year initial term at a starting rental yield of 8.25%. And lastly as John mentioned we do expect to close the seventh and final building in our life science (inaudible) with Forest City in May.
Our expected investment of $28.3 million represents a 49% interest in its $58 million property and the joint venture will assume a little less than $30 million of secured debt on the property with the rate of 6.4%. Before turning the portfolio results I would take a moment to mention some of the changes we made to our sub-line and disclosure this quarter. First our income statement now includes the line in continuing operations labeled income from unconsolidated joint ventures and this represents our share of the university product life science joint venture net income. Second, in the investment in portfolio sections of the supplement, we report both independent living and assisted living properties under a combined senior housing category. We have also added some disclosure on our entrance fee communities that you can see on page 23 of the supplement. And last we have included additional disclosure regarding our life science investment on page 30 of the supplement.
So turning now to the portfolio, as I mentioned we did complete a $164 million of development projects during the quarter which included one entrance fee property, one medical office building, one debenture care facility and four rental senior housing properties.
Regarding lease up, we did see continued progress moving assets out of our unstable bucket with 7 properties moving to our stable portfolio this quarter. I note this three of the first quarter stabilizations were entrance fee communities which each have an aggregate occupancy in excess of 85%.
For our senior housing and care portfolio, our performance remained steady and occupancy continued to improve versus the prior quarter. Our stable senior housing payment coverage comprised of the former IL and AL categories has been in a very tight range or in 1.5 times over the last eight quarters, while our stable senior housing occupancy for the quarter increased 20 basis points sequentially to 89.4%.
Our skilled nursing has also performed well with stable payment coverage there consistently in a range right around 2.3 times over the last eight quarters and skilled nursing stable occupancy also improved by 40 basis points sequentially this quarter to 84.2%
Now I would like to provide an update on our entrance fee communities. We currently have 14 properties with an investment balance $759 million at the end of March representing 11% of the portfolio. During the quarter, we completed the construction of one entrance fee property with an investment balance of $55 million on which we are currently recognizing the yield of 6%. The current rental yield for 13 open communities remains at blended 6%. And I point out that they were no adjustments made this quarter.
We did expand our disclosure as I mentioned on page 23 of the supplement and there you can see that the aggregate entrance fee occupancy for our open facilities at the end of March was 46% while rental occupancy within these communities stayed 79%. We are pleased with the progress of our open communities as they continue to meet moving budgets. Year-to-date through April 23, we have had 66 entrance fee move-ins versus our budget of 64.
You know in effort to get some additional perspective regarding historical occupancy trends here. If you look at the twelve entrance fee properties which have been opened since August of 2009. Total occupancy within these communities has increased from 50% to 62% through April of 2010. This was comprised on an increase in the entrance fee unit occupancy from 39% to 50% over this period and an increase in rental unit occupancy from 66% to 80% over this period. And most importantly I think as a result of these improvements we are able to move three of entrance fee properties to our stable portfolio this quarter.
Now moving over to medical facilities, our hospitals continue to report stable performance with an eight basis point improvement in year-over-year payment coverage that is 2.3 times before management fees. Our medical office portfolio also had a solid quarter with an increase in occupancy to 93% and the strong quarterly retention rate of 93% as well.
Our overall NOI for the first quarter was $27 million which is up 13% sequentially due to recent acquisitions and development completions. And thanks to our NOI for the quarter it was $19.9 million which was down 5% year-over-year, I would say this result was in alignment of our internal budget and we do continue to forecast same store NOI of approximately negative 1% for the full year. The first quarter really should be our weakest quarterly results as we expect same store NOI in a range of plus or minus 1% for each of the remaining three quarters of 2010.
Last during the first quarter, we did spend $3.8 million in CapEx in our MOB portfolio and continue to anticipate $17 million for the full year. Our life science assets were in our portfolio for 38 days in the first quarter as we close the first six buildings in our joint venture with Forest City on February 22. Results are in line with underwritten expectations and we are pleased with the communication and information flow between our life science team, Forest City's executive management and their asset management group on the ground in Cambridge.
Looking now at our same store revenue growth in our senior housing skill nursing and hospital portfolios as presented on page 23 of the supplement was a decline of 1.5% in the quarter. This was again a result of the yield reduction at several entrance fee communities on year-over-year basis along with two minor reductions in our skilled nursing portfolio due to some restructuring which occur in the second half of 2009
Excluding the impact of these operators, same store senior housing revenue increased 2.4%, skilled nursing revenue increased 1.6% and overall same store revenue increased 1.9% for the quarter. We have actually seen some higher than budgeted increases thus far in 2010 generally driven by CTI increases which have been in 3% range for each of this first three months of the year. We do remain comfortable of our full year forecast for positive 2% same store NOI growth in our senior housing and care and hospital portfolios excluding the impact of the reductions previously discussed.
Turning now to the financial results, we reported normalized FFO per share at $0.75 and normalized FAD per share of $0.70 for the quarter. Earnings results decline versus last year as anticipated due to the impact of the significant balance sheet de-leveraging completed during 2009.
And now I would like to provide a few details and some of the normalizing and unusual items this quarter. The first is we did record a net gain of 6.7 million on first quarter dispositions which included two skilled nursing facilities and two medical office buildings and these sales generated growth proceeds of nearly $40 million for the quarter.
Next as previously disclosed, we have repurchased $302 million of our existing convertible senior notes in the quarter which resulted in an $18 million debt extinguishment charge. Also during the quarter we recorded transaction cost of $7.7 million consisting of the $5 million lease termination fee that George discussed earlier and $2.7 million of acquisition cost associated with first quarter investment activity that are now required to be expensed and incurred. As a majority of these acquisition costs relate to debt prepayment fees in connection with our MOB portfolio acquisition.
Our G&A expense was $16.8 million for the first quarter, slightly below the $17 million to $18 million first quarter guidance we provided on our last call. This includes $3.7 million of accelerated expensing of stock and options for certain employees and directors which normally occurs in the first quarter every year and the $2.9 million investing of our performance-based stock award.
After the remaining three quarters of the year, we continue to expect the G&A run rate of approximately $11 million to $12 million. As we discussed on the last call the $2.9 million performance-based stock award would be excluded from our normalized results, this payments represents the performance based grand page that George Chapman for meeting performance based criteria over the year's 2007 to 2009. And this was the payment that was made at the discretion of the board in January this year and thus was expense when paid and we believe not appropriate part of our normalized quarterly results.
And regarding our dividends we have recently declared the 156 consecutive quarterly cash dividend for the quarter ended March 31 of $0.68 per share and which represents a rate of 2.72 annually.
As I mentioned last quarter the board approved the 2010 quarterly cash dividend rate of $0.68 per share beginning with this quarter. In terms of capital activity I think our capital activity has been very positive as we successfully issued 342 million of 3% convertibles notes during the quarter which allowed us to repurchase portion of our existing four and three quarters convertible notes. By completing this transaction we extended approximately $300 million of near term debt maturities to release 2014 and reduce current cash interest expense. Now we also raised $300 million of unsecured senior notes that closed in April at an attractive 6.2% yield.
As this transaction did close subsequent to quarter end on a pro forma basis on March 31 line of credit balance was reduced to 130 million. In terms of equity this quarter we received $16 million from our drift program to the issuance of $386,000 shares at an average gross price of 40 to 50 and we issued no shares under our equity shell program this quarter. Think our credit profile also remained strong, currently our debt to undepreciated book capitalization ratio is 39%. Our interest in fixed charge coverage stands at 3.7 times and 3.0 times respectively. And net debt to trailing 12 month EBITDA is 5.4 times. Secured debt remains low at only 10.7% of total assets at the end of March.
Last of this review our 2010 guidance and assumptions, we are increasing the high end of our acquisition guidance as George mentioned by $200 million this quarter as we continue to see attractive investment opportunities. This increase brings our growth investment guidance to a range of 1.0 to 1.4 billion for the full year. This includes $700 million to $1 billion of acquisition in joint venture investments and $300 million to $400 million of quantitative development.
We continue to forecast $450 million of development conversions and $300 million this dispositions which will primarily consist a [free spending] skilled nursing assets. In addition, we expect that our previously announced secured debt transaction with HUD should close late in the second quarter generating $80 million of proceeds in an attractive rate of approximately 5%. As a result of our unsecured debt issuance April, we've lowered the high end of our normalized FFO and FAD guidance by $0.05. We now expect to report normalized FFO in a range of 310 to 320 per diluted share, and normalized that in the range of 287 to 297 per diluted share.
Our expectation for net income available to common stock holders has been updated to range of $36 to $46 per diluted share as detailed in our press release. That concludes my prepared remarks. And I think operator we'd now like to open the call up for questions, please.
(Operator Instructions) First question will come from the line of Craig Schmidt with Banc of America/Merrill Lynch.
Craig Schmidt - Banc of America/Merrill Lynch
Tell me your outlook for acquisitions, the total market for the remainder of 2010, I see that you have raised your upper end but now it is the four months that we have seen a good indication of activity for the rest of the year? Or do you actually expect the entire market to pick up in activity?
That's a difficult question to answer. We had a very good first quarter and I don't think that can be indicative of our year at least. Our benefit really comes from our full spectrum investing and John and his team are finding a lot of great health system related investments and Chuck side, Chuck Hermon side, we really cover the country and are finding our share of investments. So no cap rates are pretty low as frankly. There hasn't been much of an adjustment. So we have to work hard to find the right risk adjusted investment. So I mean I think people are working hard in our REIT and other REITs and others specialty lenders and there is a lot of competition, and I think we are going to get more than our share. I wouldn't want to say anything more at this stage.
Craig Schmidt - Banc of America/Merrill Lynch
And your acquisitions directors and they focus on a certain type of health care asset or they work the entire breadth of the area.
And Chuck is responsible for senior housing which encompasses independent living all the way through skilled nursing and more often than not, his team can end up finding investments that can be turned over to John's team and vice versa. It really is very much opportunistic. On the other hand, I would not at all be surprised to see as a gravity towards nearly 50-50 split over time between the medical facilities area on one hand and our senior housing on the other.
But it is very much opportunistic. We are looking for good and very good buildings that are future oriented that take into account the customer preferences that are being asserted even more strongly as each year ensues. And we are looking for the best operators and the best health systems because we really found that by finding the good grade health systems that we want to bring the best care and by looking to operators who have a history of delivering cost effective attrition to services that we do pretty well.
And one of the things we found is that we are 60 or more operators that are part of our sort of ongoing relationship groups in the senior housing that we have recurring business that some people may or may not have with good relationships with health systems. We think we will get recurring business but it is really hard to say exactly what ratio they will come under in the remainder of the year or for two year period. I think we are going to move towards about 50-50 split over time.
Our next question will come from the line of Jay Haberman with Goldman Sachs.
Jay Haberman - Goldman Sachs
Just want to focus on the joint venture relationship or partnership that you have now at Forest City in the life sciences side. Can you speak to opportunities you mentioned looking for some acquisitions. I am just wondering, can you talk about your conversations with Forest City and perhaps what you are seeing at this point in the market, cause this is a fairly competitive landscape at this point I would say in that segment?
Jay this is John Thomas, I think that's the fair assumption about the market we are seeing some, the way our relationship works with Forest City is very collaborative we are not obligated to take the opportunities we find and vice versa but that is in fact how we're operating in the partnership really across the country and some of the major life science markets and communities. We are seeing some uptick in activity with kind of corporate campuses and again some hospital-related development opportunities. So we are seeing more activity in seeing some competitive things and again some of the things we are looking at our, I would say some one-off market and being brought to us by through our relationships
Jay Haberman - Goldman Sachs
And I just want to switch back to senior housing for a moment in the CCRCs they clearly have been impacted by the downturn thus far, I know you have talked in the past about reducing your exposure but I am just wondering if you think this might be an opportunity in the next two and three years as you start to see the housing markets recover.
In my opening comments I think I have confirmed your view that we believe that our independent living and maybe to a lesser extent CCRCs will benefit from the uptick in the economy and the improving housing market and maybe more importantly the demand supply relationship. So we re bullish, on the other hand, we have to see our performance in our CCRC ranks and there is always a possibility that we will find an opportunity for one of our good operators or have an opportunity with another operator that we like to do something it can do a CCRC type of investment or something, we have got those at the right price and with the right operator and the right market. I can't say we wouldn't do that. But right now we are looking for performance and we will make those assessments as opportunities incur.
Just I think a year or so ago, we purchased a distressed CCRC for Donald Thompson senior living communities at what we thought was $0.50 on the dollar and the fill up in the sales have been slow. It just hasn't anticipated but we think it was very good value. So we never say never.
Jay Haberman - Goldman Sachs
Okay lastly you didn't change the disposition guidance I mean should we take this is just not a good time to sell or why not take advantage of the capital on the sidelines and you will continue to reposition the portfolio in your underperforming assets.
Right now our disposition guidance remains the same, many of the folks that buy us out go to the agencies. The agency re-financings tend to move on very slowly. There are other ways to do those re-financing seems specially lenders, to some degree bonds and all of those take some time and we will also be by year-end whether or not they will get done.
Our next question will come from the line of Rich Anderson with BMO Capital Markets
Rich Anderson - BMO Capital Markets
I guess the kind of make sure is it maybe semantics George but you said you're combing the market, 50% of your interest potentially could be in the MOB area. But the comment was made that maybe the office business would not see infiltration of interest from reform. It will be more on the ambulatory side, are you just using MOB as more of the broader term including the ambulatory care or how do you.
More and more (Inaudible) its hard to tell a difference doing it in most of our we probably prefer to have ASCs or Ambulatory Surgery Centers in most of our medical office buildings and today you can't even see the differences between the old 30,000 and 40,000 square foot MOBs without ASCs and today's so called MOBs that could be 150,000 or 250,000 square feet with an ASC with lowness, with full spectrum of testing, it's just night and day. John you want to add anything?
I would just add that we're using this somewhat generically to include early a 50-50 split from senior housing and chief medical including hospitals and life sciences as well. So again as George said before, it's really opportunistic and where we see the biggest, the best and kind of brightest opportunities been. The emerging opportunities across the spectrum and most of our development stars are exactly as George described larger on campus, ambulatory care centers that are very integral to them (inaudible).
Rich Anderson - BMO Capital Markets
Okay I understood, want to clarify that. You mentioned also investment enthusiasm and its big team in this call today and how reform again getting back to that could play a positive role but it seems to me that's a very long-term factor and maybe the shorter term factor from an investment standpoint for you might be hospitals getting squeezed from Medicaid getting pull back on them and hence having to seek out third parties. Do you think that that's the right way to think about in terms of how you get involved in the near term, is it more of Medicaid squeezing phenomenon or is it really reform this year that will drive investment.
This is John again, across our portfolio in our government payer as part of our percentage of payer mixes is relatively low and Medicaid is even very small portion of that. So, again in the near term the opportunity is in the health system building larger building institutes capture the physicians supplied us out there and the higher quality physicians and again that's part of our life sciences thesis as well because those physicians are looking for not only clinical opportunities but research and clinical development opportunities as well. That's really the near-term but again as suite of Medicaid will have some impact on mid lower and skilled nursing but in longer term we see the up take picking up the hospital system is trying to attract the highest in best demographic patients.
We see the evolution, the change in Health Care is being the market driving different types of buildings real estate platforms, out patient surgeries today you get systems that are doing 60% or 65% in some systems out patient procedures as opposed to in-patient. With customers demanding different and better care and a better environment frankly the hospitals and the health systems have to build or substantially renovate to have better space to perform and that's where we position ourselves, wanted helps a little bit that some of the foundation's firms are down a bit because of the market. It hopes I guess that bonds have been somewhat less predictable the last two or three years for the systems. But maybe more important in the long run is our ability to go to systems and provide solutions and that can be development, it can be consultative, it can be managing the MOB to separate the hospital from any possible fraud and abuse issues and ultimately then to provide the funds and built of the new customer centric facilities. That is really the trend that we're on, just which is analogous to what we're doing in senior housing. So we're very bullish about our opportunity to make new investments.
Rich Anderson - BMO Capital Markets
Could you comment on your CapEx exposure for life science in the joint venture if its material?
No (inaudible) material, we have set a reserve for none of leases there, the tenants. These are more or like absolute net leases where we're responsible for kind of core and roof and that the tenant's responsible for everything else. We have an appropriate reserve there but in the long-term need and frankly most of the buildings are newer. We feel like we're being conservative but not a high exposure to CapEx there.
Rich Anderson - BMO Capital Markets
Unfunded development you mentioned $193 million of unfunded development commitments right now but that number grows right over the course of the year. So if you're considering $300 to $400 million new store. Where do you think that that unfunded development commitment number goes to over the course of the year?
You're correct. It necessary to get to the $300 to $400 million guidance, it does imply a few new starts and I think we said we are selectively looking at development that again is supplement to our acquisition growth this year, so I guess its tough to take a number but probably maybe another $100 to $200 million is the number that would be necessary to get to the aggregate $300 million to $400 million of funding this year.
Rich Anderson - BMO Capital Markets
Okay, so it's simple math really. And then finally you mentioned the housing market impact on CCRCs and senior housing, but can you make that same analogy to the entrance to the model? In another words are you willing to start looking at that area as a place to invest as you are with CCRCs in the more generic product.
We think the rental units are going to come back faster. Okay we think that there is real opportunity in the dementia space. And that's going to be more of our priority because we think its going to take our first. We will look very carefully at potential of buying opportunities but there are going to have to be awfully good for us to be looking at them seriously during the next quarter or so. But you never know.
Our next question will come from the line of Todd Stender with Wells Fargo Securities.
Todd Stender - Wells Fargo Securities
Hi guys, first question just on the new construction to facilities that you broke ground on in the quarter. What's the impact of the economy having on your decision to break ground? Were these on schedule? Have they been delayed and what's the timing look like in the stuff you will break ground on for the remainder of the year?
The two medical office buildings we announced, one is cancer center on Tallahassee memorial campus. This is one where it's a 100% mass released to the hospital and you know frankly that the economy is allowing us to get building materials and other construction cost at lower than would have been two years ago. So its excellent timing from a cost perspective and the hospital systems related for small period of time. But really no expectation or there's no real impact in the economy on that project.
The on campus building for low ma Linda is attached to the hospitals that we are building Loma Linda University of Medical Center, Murrieta. Very large projects again if you know California hospitals and hospital construction. You try and need as much outside of the hospital building yourself into medical office buildings today because of the hospice requirements and just a cost per foot of the hospital versus medical office building. And completion of that building near the same time as opening of the hospital is discreetly important and we've had tremendous success in pre leasing with positions, the hospital and other kind of institutional tenants in that building that are synergistic with the hospital there. So again, same result in the economy we were able to lower our budgeted cost on steel and concrete and other supplies and frankly in that community and providing a lot of jobs that or otherwise needed so we are very well received in that community.
Todd Stender - Wells Fargo Securities
And Scott for the HUD financing you are expecting later this quarter, I think it started at $85 million. Could that come in still? Is that number moving around at all?
I think it's moving around a little bit Ted, I think we're pretty comfortable that 80 is going to be closer to the final number and right around the 5% range. That should happen we think right before the end of the second quarter.
Todd Stender - Wells Fargo Securities
And how many skilled nursing facilities will secure that debt?
Todd Stender - Wells Fargo Securities
And how long is that for, is that 10 year paper?
Yes, it is.
Our next question will come from the line of Tayo Okusanya with Jefferies & Company.
Tayo Okusanya - Jefferies & Company
Just a couple of quick questions. In the supplemental page, I believe the conversion estimates for 2Q 10, you mentioned that there is one fairly large CCRC project of $111 million and you haven't been able to determine the yield on yet?
I will take that one Tayo, I think we are trying to be just more practical contractually that yield initially was scheduled to be 10% and that's how we were listening it in the supplement previously. And I think we have been pretty transparent in the likelihood that we think in a more like 6% it should be the average start rate for most of our entrance fee communities. And so until we actually determine the rate and its not finalized at this point we felt more appropriate just to be determined as opposed to higher unrealistic rate.
Tayo Okusanya - Jefferies & Company
But you do expect that kind of will come in around the 6% of all the others have been coming in at this point.
Our average is fixed and we still haven't finalized this one yet.
Tayo Okusanya - Jefferies & Company
That's the first things and then kind of thing about your growth strategy, one of the few companies, you are not only one now who is actively making acquisitions and you have also begun some development as well and your guidance seems to imply yet another $100 million to $200 million of development? I guess the way you are approaching things seems to be fairly different from what we have seen from some of your other counterparts except say maybe NHP in regards to how quickly you are moving versus your growth engines versus some people who think its still be a bit more gun shy, I don't know just curious you feel it's the right time to be as aggressive when some of your peers still seem to be backing off.
I want John and Scott to come on in this too but we've used virtually every down period, whether it was the old change to SNIP reimbursement years ago to this period, to really plan for additional acquisitions and development coming out, out of the bad period. So I think that we have done a pretty good job over the years of planning for being prepared to move forward and we have a lot over relationships both within the senior housing and the acute care space so that when we are ready to go, when we can alert our operators. And to that point they find great deals for us, I mean they are an important part of John and Chuck's marketing team if you will.
And I think it's just as the ability to invest across a full spectrum to provide other services and because of the relationships that go back decades in some cases allows us to come out of the gate pretty quickly. We think there are some very good volumes there. We think we are building some awfully good facilities that will stand the test of time and so this has just been our approach to doing business I think its going to pay off very handsomely first. John you want to add-in.
I think I mentioned this in my comment as before, they certainly of health care reform has kind of unleashed hospitals to move forward projects that they had attended last year due to both the economy and trying to assess what the health care reform legislation is going to look like. So we had a fairly deep of a pipeline of projects that were somewhat on hold with the hospitals I mentioned the Tallahassee cancer center has somewhat been an example of that.
And so again with certainly reformed the opening of the capital markets and still working with hospitals that see a necessity of moving forward more aggressively now, than they were six months ago.
So we get its really very opportunistic and strong occupancy on the development and strong, strong yields in this market.
Tayo Okusanya - Jefferies & Company
Okay just one other question, in regards to health care reform I would appreciate that if guys could touch a little bit on how you think bundling may end up impacting the post of acute care world especially with the [L-tax], and as well as skilled nursing if you are getting any indication of that at this point.
That's a great question I think the legislation has written is provided for demonstration projects that you know will last three to four years. I think the hospital system see some certainty that bundling will occur between the hospital and the (Inaudible) settings as I mentioned before. Certainly aligning within patient rehab aligning with long-term acute care and then over time reestablishing alignment with certain skilled nursing facilities as well, the bonding will take a few years to work to do demonstrations but, again the people primarily, depending our office of the legislation believe in bundling is a future necessity of controlling both the cost of care but quality of care. And so hospital systems are seeing that necessity and trying to align with those both acute care providers. As I mentioned before, side servicing neutrality is build within a concept of bundling about the payment systems where if the patient could be treated in and in patient rehab for long-term acute care facility or skill nursing facility eventually decide a service neutrality will pay each of those three facilities the same amount for that patient something that the skill nursing facility has been pushing forward for sometime and has some success in establishing that as a long term objective of the reform legislation.
Our next question will come from the line of Michael (inaudible) with AIG Asset Management.
Just of the due disclosure on page 23 of supplemental, could you give us a sense as to the thought process one around, up the one of breaking out since the (inaudible) and to removing the interest fee portfolio. And then also the coverage metrics of the operator level basis other than due disclosure, can you tell us what that would have been maybe 4Q and then 4Q of last year?
You're breaking up a little bit I think I got the gist of your question. In regards to our decision to consolidate the (inaudible) buckets into the senior housing methodology, if you look at it, it's actually about 80% of our assets there, our combination thereof, so and it's generally similar disclosure in the industry. I think you can look a few pages later we did give the restated trends on senior housing. You can see the trailing results on a combined basis, over a number of quarters and to answer your coverage question, I think coverage is down one or two basis points sequentially this quarter in the senior housing area.
And then just of the equity interest investments on consolidated JVs. You reported the $298 million, how is that flowing through to the balance sheet in terms of where does it be accounted for because the equity investments are actually showing 165 of (inaudible)?
Right and the equity investment line is our equity component is about $160 million is new year there this quarter and these secured debt is about $142 million and that is off balance sheet but disclosed elsewhere in the supplement.
Our next question will come from the line of Jerry Doctrow with Stifel Nicolaus.
Dan Bernstein - Stifel Nicolaus
This is Dan Bernstein going in for Jerry. I wanted to go back to the deferred rent on the lease up properties. Now that you have disclosed in the occupancy and the entrance CCRC, do you have a general range of where that occupancy has to go before your operators will feel comfortable payment the deferred rent?
I think the perspective there as we look at that, you have to look at the aggregate portfolio with each operator but if you look at an individual facility and the decision to stabilize the three entrance fees that were stabilized this quarter all have over 85% occupancy. Once we get to that 80% aggregate occupancy we think you can support a rental yield of at least 8%. So that maybe a metric you could think of in terms of watching aggregate occupancy in terms of our ability to potentially start to recover some of these deferred rents over time.
Dan Bernstein - Stifel Nicolaus
And also want a more general question on the acquisitions, are you seeing any pick up in interest from the health systems to monetize our assets post healthcare reform?
I would say yes, there was not a lot of system monetization last year but I think fair to say we're in discussions with a number of health systems today looking for either monetizing existing assets or looking at refinancing in new and different ways for begin to move forth with existing projects that they put on hold standing legislation but the number of calls and the number of hour, the amount of activity has increased dramatically over the last 90 days.
Dan Bernstein - Stifel Nicolaus
Is it mostly focused on MOBs, are they also looking to sell part of their hospital campus (inaudible).
Yeah I think we're very reluctant to sell hospitals that are looking at alternative financing for either hospital expansions or new hospitals. (Inaudible) bond market is still somewhat a disruption and again I think they are looking for different and creative ways to finance their hospital expansions but on the post acute care facilities again, many of them are aligning with operators. Fair to say all of our operators are working hard to joint venture or otherwise establish relationships with hospitals systems, in a kind of bundled environment or future so there is more monetization and development opportunity for hospitals in that context.
Dan Bernstein - Stifel Nicolaus
And George you mentioned that pricing is kind of a low for acquisitions. Do you see the cap rates coming down at all over the next say 12 months given where cost of capital is today?
It's been really difficult to figure out how cost of capital and cap rates relate if at all during the last some of these periods of exuberance, irrational or otherwise so that's hard to answer. I do not see cap rates going up at all. There is a lot of competition out there and I am glad we have a very broad reach to be and a great
Relationships formed over many years or this could be a fairly difficult senior housing acquisition marketplace.
(Operator Instructions). Our next question will come from the line Michael Mueller with JPMorgan.
Michael Mueller - JPMorgan
Actually most of my questions have been answered but just one in terms of just the presentation of normalized FFO. You have acquisition in the guidance but doesn't appear that you're putting the acquisition cost or factoring that into normalized FFO. Two questions, number one what you see is a general rule of thumb for the acquisition cost on a go forward basis and then secondly, why are you guys excluding that from normalized FFO.
I think you know this is the first quarter you're required to expense these transaction acquisition costs as they are incurred. And I think if we said the majority of the cost this quarter were actually related to buying back the debt associated with this or Aurora portfolio and some of those charges. So, exclusive of that, I don't the numbers is very large and we'll basically will provide it for you, we'll break it out and is very hard to predict because we don't know what we're going to have from quarter-to-quarter if any and we'll continue to disclose it and in our opinion we'll back it out of normalized numbers. No additional costs there are included in our guidance.
(Operator Instructions). Our next question will come from the line of Dustin Pizzo with UBS
Ross Nussbaum - UBS
Hi Ross Nussbaum here with Dustin. I am looking for a supplemental on page six of the balance sheet, can you help me get my arms around the $78 million of loan receivable that's on non-accrual. What's going to be resolution of that?
The number is least over the last year so has remained at about that level. And I think we are providing everybody get in general disclosure on our loan portfolio. If you look at our loan portfolio in aggregate it's down about 6% or 7% of our whole company. It's $444 million this quarter, as we said there is actually three of our operators that are in our Top 10 actually make up about $260 million of that $444 million total about 60% of that. And we are very comfortable with those loans. And of the rest, really, what's happened over the last year, we generally get our hands full of loans the primary composition of the loans that are on non-accrual or the early stage senior housing operators, more the independent living or have a sale component to them and the number really hasn't changed too much.
So I guess as you do your quarterly accrual investment and lone lost reserve analysis it's really contingent upon forward-looking and looking out often times as many as five to seven years to assess the value of those loans. And we think we are being conservative by not accruing any interest there and unfortunately take a little bit of time and to assess the ultimate value of the principal there. So we choose to put them on non-accrual and as those sales in projects will take some time to revolve that's why it stated at the level it has been there for a while.
Ross Nussbaum - UBS
I wonder those loans technically mature.
I don't have the average for that in front me, you guys know that?
No I have to get that one for you.
Ross Nussbaum - UBS
I think where I am going with this is it would be great if we could get a page on the supplemental that maybe raise out the credit staffs for that loan receivable category did go through, what's the debt service coverage, what's the loan to value, what rate again, when do they mature? What's in there because other than that one number on the balance sheet there is really no disclosure on it?
We received the question and I guess I just pointed out that it is 1% of the portfolio but we do receive questions so we try to evaluate that as best we can.
There are no further questions at this time. And I would like to turn the call back to Mr. Chapman for closing remarks.
Thank you for your participation and note that Scott will be available today for any follow-up questions. Thank you.
Ladies and gentlemen this does conclude today's teleconference. You may all disconnect.
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