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Executives

Jeff Miller – EVP, Operations and General Counsel

George Chapman – Chairman, President and CEO

Charles Herman – EVP and Chief Investment Officer

John Thomas – EVP - Medical Facilities

Scott Estes – EVP and CFO

John Getchey – VP, Senior Housing Underwriting

Analysts

Jerrall Gialty – Morgan Stanley

Dustin Pizzo – UBS

Ross Nussbaum – UBS

Karin Ford – Keybanc

Rich Anderson – BMO Capital Markets

Jerry Doctrow – Stifel Nicolaus

Tayo Okusanya – Jefferies & Company

Todd Stender – Wells Fargo Securities

Rob Maine – Morgan Keegan

Health Care REIT, Inc. (HCN) Q2 2010 Earnings Conference Call August 5, 2010 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter Health Care REIT Earnings Conference Call. 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. Jeff Miller, Executive Vice President of Operations and General Counsel for Health Care REIT. Please go ahead, sir.

Jeff Miller

Good morning, everyone and thank you for joining us today for Health Care REIT’s second quarter 2010 conference call. If you did not receive a copy of the news releases distributed late yesterday afternoon, you may access them via the company’s website at www.hcreit.com. A live webcast of today’s call maybe accessed through the company’s website.

Jeff Miller

Thank you, Tonya. Good morning, everyone and thank you for joining us today for Health Care REIT’s second quarter 2010 conference call. If you did not receive a copy of the news releases distributed late yesterday afternoon, you may access them via the company’s website at www.hcreit.com. A live webcast of today’s call maybe accessed through the company’s website.

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 its projected results will be attained.

Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news releases and from time to time in the company’s filings with the SEC. With that, I will turn the call over to George Chapman, our Chairman, CEO and President, George.

George Chapman

Thanks very much, Jeff, good morning. Needless to say, the Management Team was quite pleased with our quarter. We’re on track to record the highest annual investment volume in our history. We are also very pleased to announce the partnership with Merrill Gardens. As you know, in the last couple of years, we’ve managed the company in a conservative fashion during the capital-constrained downturns in the economy. Yet, even during that time as we reported, we used this time to strengthen all of our capabilities and add key personnel. We also maintained dialogue with excellent, existing and new operators in health systems as we awaited economic improvement and reasonably-priced capital.

And now, we’re here. And we’re pleased that our investment platform is operating as planned. We now expect to make investments in excess of $2 billion this year, with strong investment performance continuing in 2011 and beyond. In turn, these investments should drive, and are driving, significant earnings growth as well. And we are quite pleased to raise our dividend and would expect continued increases going forward. Not surprisingly this morning, our primary focus will be on our investment success, as well as the reasons for the success and the reasons for our confidence going forward.

In virtually every call, I have emphasized the critical importance of our full-spectrum investment platform. This platform permits us to knowledgeably invest in facilities from early stage senior housing to hospitals. In doing so, we can pick the best risk reward, the best projects, the best operators. We are capable of doing so due to our team that has expertise across that entire spectrum. We benefit as well from our development and property management capabilities that permit us to provide solutions to operators and systems. In short, we are much more than simply a capital source.

They key to our success continues to be our relationship approach to investing. We looked back at our five years and found that 80% or more of our investments came from existing relationships, off-market opportunities. We know the operators and systems and have confidence in their ability to deliver quality care in an efficient manner. They know our commitment and in turn to them, in our flexibility. Moreover, they have witnessed, firsthand, our ability to add value to their projects and programs. And you should note that we, regularly, add new operators to our relationship programs.

Due to this relationship approach, we generally do not need to pursue auction transactions to make our year. We believe that too often, these situations tend to price at high levels and do not necessarily engender the relationships that produce future success. Moreover, these large transactions entail concentration risk which we work hard to avoid.

Year after year, we have recurring business with our operator and health system base and that provides a predictable, high level of investment support, while maintaining our sector-best diversification. Last night, we are very pleased to announce our expanded, deepened relationship with Merrill Gardens. Our $817 million, 38-community venture with Merrill Gardens has all of that element we believe are important for any greater (ph) partnership, first-class operator, quality real estate in attractive markets, greater growth potential than our typical rental escalators and a very strong alignment of interest.

In this case, we have been doing business with Bill Patent (ph) and his team for nearly 15 years. They have operated in good and bad times and have the seasoning that comes from those experiences. The real estate is high quality and, generally, in a high (ph) entry markets in Washington and California. And we believe that this should provide strong pricing power as the economy continues to improve. Moreover, with our 80/20 ownership structure at HCN’s (ph) and Merrill Gardens interests are very well aligned. This is a venture, we believe, should provide excellent growth opportunities for both of us going forward.

I’m also confident that beyond the Merrill Gardens transaction, we will continue to develop or expand the relationships with other high-quality operators and systems. Some will be in the radio structure, others won’t. But in all cases, those relationships are important due to the quality of operator and assets. They also provide, will provide, future portfolio of growth opportunities as well.

Our investment activity has only enhanced our portfolio performance. Let me give you some data points. At the end of the second quarter, approximately 75% of our portfolio-committed balances were co-termination facilities and senior housing space and modern customer-focused medical office buildings and cube-care facilities. These numbers should approach 80% by year end. On the other hand, Freestanding skilled nursing and Freestanding senior housing facilities are now down to 14 ½ % and 5.1% of our total assets, respectively.

And we expect the freestanding skill nursing to be in the 12% range, area, by year end. Very importantly, after Merrill Gardens closing, our private-pay percentage was up to 73%. We’ve also maintained our historical commitment to portfolio diversification with our top five and 10 operators comprising only 24% and 36% respectively of the portfolio. And I should point out that after the Merrill Gardens investment, Merrill Gardens becomes our largest operator at 8.8% of the portfolio and our top five and 10 operators comprise only 28% and 40% respectively of the portfolio, but they’re still the best in sector diversification. Our facility coverage split at two at .03 to 1 the highest coverage in our history. Entrance fee momentum is picking up with the expectation of rate increases beginning in 2011. And our medical office building occupancy remained at a sector-high of 93%.

I want to put our program and performs in a historical perspective for everybody. I looked back at my comments from May 2007. In a call, I’m referring to our shadow pipeline of $2 billion. The vast majority of which were in the long-term care space. I suggested then that as our medical facilities platform was strengthened, the pipeline would become even stronger and more certain. And now after a couple of years of tough economic times, we entered 2010 with optimism and an even better platform due to key personnel additions and a strong medical facilities team. And today, the platform is working.

Today, our so called shadow pipelines stands at approximately $6 billion. Within that pipeline, approximately 60% are senior housing and 40% are medical facilities, more than 80% of acquisitions. While there is no certainty that we will close all, or even substantially, all of the transactions in such pipeline, our success with our relationship program does enhance the possibilities of substantial, additional investments going forward.

Today, because of the focus on our strong investment strategy and our success, I’m going to, first, turn the call over to Chuck Herman who was Head of our Senior Housing Group and then John Thomas, Head of the Medical Facilities Group, to provide more in depth information and color on their spaces. Then the discussion will be turned over to Scott Estes, who will review our financial results, and Chuck.

Charles Herman

Thanks, George, and good morning everyone. I’ll provide an update on the senior housing and care investment environment, our deal at pipeline and portfolio performance.

Health Care REIT is known for its strong investment platform. Our senior housing team is topnotch and well net worth. We are in leadership positions in the industry trade associations and are viewed as a partner by many companies in the sector. We currently have over 51 active senior housing in long-term care operators in our portfolio because of our reputation as a partner, we are able to leverage those relationships into a very strong deal-sourcing network.

Historically, over 80% of our transactions were off-market. One of our very strong relationships is the one with Merrill Gardens. George has already discussed the recent venture. We have worked with Merrill Gardens since the late ‘90s, when they took over the portfolio of assets that were at least to another operator. Since that time, we have completed several others successful transactions and developed a very strong relationship. We look forward to continuing that great relationship in the future with Merrill Gardens.

Currently, we have a very robust investment pipeline in Senior Living. We’re actually reviewing our 3.5 billion of new Senior Living in Care transactions with close to 90% being acquisitions. We are finding that many companies are looking for long-term financial partners with good reputations versus just chasing the lowest priced capital.

Health Care REIT is very well-positioned to help companies recapitalized or provide growth capital for the futures. Since we are well capitalized and are known as a good partner, we have added six new relationships in the last year or so, with several more relationship in the works. This new relationships along with our existing ones have allowed us to be in track to have our highest investment volume in the company’s history.

Currently, there are two active sources of capital for the Senior Housing and Care industry, REIT and GSCs. We feel that the limited amount of capital in the marketplace as is a good time for knowledgeable investors to be active. The fundamentals of the Senior Housing and Care industry have held recently firm and there are strong demographic trends.

We believe the current environment, with the current environment, it’s an ideal time for us to invest. In order to cash your high quality assisted living, independent living and combination assets, we are finding cap rates need to be in the mid 7 to mid 8% range and skilled nursing home cap rates need to be in the low double digits to meet teams (ph) depending upon the quality of the asset.

Turning to portfolio performance, at the end of the second quarter, our Senior Housing and Care portfolio included 445 properties within investment balances, 4.1 billion. Our Senior Housing portfolio continues to perform well with payment carriage of 1.5 times and occupancy of 89%. Same store results were as expected with city payment coverage and a 70-basis point increase in occupancy versus last year.

Our Skilled Nursing Home portfolio payment coverage increased to 2.3 times, which was the highest level in the company’s history.

On the same store basis, coverage and occupancy increased seven basis points and 40 basis points respectively.

Regarding lease up, we are starting to see an increase in monthly absorption rate at our communities. We give you some perspective. Our average rate of fill-up had nearly doubled this year to 3.6 residents per month per community versus last year’s average of 2.0 residents per month.

At the end of June, our entrance fee portfolio included 13 communities within investment balance of 651 million representing 9% of the total portfolio.

With the new investment activity that is anticipated, we expect pension fees communities to account for approximately only 8% of the total portfolio by year end. The current aggregate rental yields were at the 13 open communities’ remains at approximately 6%.

Most importantly, we expect to be able to receive higher yield commencing in 2011.

There is nice progress in the fill-up of these communities. The entrance fee component increased 49%, up 3% quarter over quarter, while the same store (inaudible) component increased 3% to 82% occupancy. The aggregate entrance fee move-ins year-to-date through July 2nd totaled 107 versus our budget of 98.

It should be noted that the reported rental occupancy of 79% in our supplement, reflects the fact that we added 48 new rental units during the quarter.

With that, I’ll turn it over to John Thomas to discuss the medical facility. John?

John Thomas

So, thank you. Good morning. Like for Senior Housing, the medical facility side is also seeing excellent activity and momentum. Some of which is driven by healthcare reform legislation. The impact of the legislation continues to evolve as providers in the market analyze the legislation and plan for the implications.

The pace of health systems beginning new development projects, both in-patient and outpatient has accelerated. As evidenced by the number of health systems talking to us directly or indirectly through our development partners and the number of RPs for new projects hitting the market.

The paces of modernization and efforts to raise capital have also increased by providers and developers alike. Like Senior Housing, we are managing a very active pipeline of medical office buildings, hospitals, and lifetime opportunities of nearly $2.5 billion. With at least 2/3 or 1.8 billion in potential acquisitions and 1.3 or 700 million in new development projects for leading healthcare systems.

The competition for high quality, high occupancy facility has increased but we’ve been able to maintain appropriate pricing discipline and remain very competitive.

During the second quarter, we completed the acquisition of two medical office buildings. One, 85% occupied on campus with major healthcare system and another affiliated and anchored by leading healthcare system that is 100% occupied. This brings our total 2010 annual (inaudible) investments to 213 million in 19 properties, a total of 1.3 million square feet with an overall occupancy of 98% and initial average yield of approximately 9%.

Also during the second quarter, we began construction of an in-patient rehab hospital for a joint venture between Harris Methodist Hospital and Sincere (ph) on the Harris Methodist Hospital Campus in Fort Worth, Texas.

We also began two free standing emergency room ambulatory care centers for a leading healthcare system in the Pacific Northwest with one of our development partners.

Turning to a general update on our portfolio, payment coverage for our same store hospitals saw a strong 45 basis point increase in year-over-year payment coverage to 2.8 times before management fees. This is largely driven by largest (inaudible) in-patient rehab hospital operators, which saw significant year-over-year and sequential increase in coverage.

Our medical office portfolio had another strong quarter with the occupancy of 93% and a solid year-to-date retention of 83%.

Overall, NOI continues to increase of 9% quarter over quarter to 29.5 million to quarter as a result of our acquisitions and very positive leasing activity lead by (inaudible).

We continue to expect the occupancy above 93% at year end and a full year retention rate of approximately 75 to 80%. Same store NOI increased 0.2% versus the second quarter last year and was up 2.2 sequentially. It was a nice improvement and was a bit above internal forecast.

Also there in the second quarter, we invested 5 million in CapEx bringing our year-to-date total to $8.8 million.

In Life Sciences, we closed on the seventh building through our joint venture with Forest city on June 30th. We now have more than 353 million invested through our joint venture with Forest City. Our Life Science investment is performing in line with Forest City’s projections and our underwriting assumptions and we are seeing very positive data on the current market price.

We remain very pleased with performance of Forest City’s Life Science property management and development team and the property management services to our joint ventures University Park at MIT campus. And as mentioned, recent leasing has validated our expectation of red growth in that market.

I’d like to take a minute to give you a little more background with the strategy behind our joint venture with Forest City. As we explained, this partnership has equal governance, but more importantly the communication and collaboration of our management team’s has far exceeded expectations. We are working through a pipeline of more than 1 billion in new acquisitions and develop an opportunity with Forest City, many off market and anticipate growing our investments within the joint venture.

Capitalization of these and opportunities will be determined on a case by case basis, but we anticipate no less than equal participation in the ownership and governance with these assets.

Life Sciences, research in last phases clear (ph) the authority with our academic medical center clients. And we believe the partnership at Forest City provides us a strategic advantage to meet those needs and as a natural extension of medical facility business leverage. With Forest City’s 25-year history in Life Sciences and Life Science development, and national footprint of mixed used developments, we are very optimistic about the future of this partnership and adding to our medical facilities and life size platform and perhaps generating additional Senior Housing opportunities as well.

Finally, you may have seen our recent announcement about joining Energy Star. Under George’s leadership and the excellent work of Rick Ambry (ph) on our team, we have initiated a number of programs to manage and lower the pastor utility cost of our clients. We have developed a more sophisticated energy procurement process and in-depth data and reporting capability that will assist healthcare staff to identify energy savings opportunities and cost outliers.

End result, would be lower operating cost that will benefit our tenant and distinguish our properties in their local markets, we believe it’s very important to build and maintain our facilities in a sustainable energy conscious manner to lower the cost of occupancy for our clients. We are in the act of discussions with a number of our clients about energy management tools and experience with alternative energy sources.

Thank you, I will turn the call over to our Chief Financial Officer, Scott Estes and will be happy to answer any questions you may have. Scott?

Scott Estes

Thanks, John, and good morning everybody.

Before getting to the details, I would like to say that the investment success that George, Chuck and John have discussed this morning have put us in a national and financial position.

We built a predictable future income strain with attractive returns. I point out that the average initial yield on the acquisitions completed thus far in 2010 is in excess of 8%. With a strong capital position to support our significant investment pipeline, which should in turn position the company to generate more significant earnings and dividend growth over the next several years.

Turning now to the details, we completed just under 300 million of new investments during the second quarter and have announced over 650 million of investments subsequent to quarter end. This makes total investment announce year-to-date to 1.5 billion.

I’ll review the positive impact of these investments on our guidance in a moment, but we believe that our ability to source investments is a direct result of our relationship approach and its estimates to the quality and depth of our origination team. Transactions closed during the quarter, included the previously announced Capital Senior Living portfolios, two rental Senior Housing Communities, two health system affiliated medical office buildings and the seventh Life Sciences property with Forest City Enterprises through our joint venture.

I would also announce two significant transactions anticipated to close subsequent to quarter end. First, we expect to close our recently announced partnership with Merrill Gardens in September. The partnership will consist of 13 communities currently owned by Health Care REIT, valued at 307 million and an additional 25 communities currently owned by Merrill Gardens, valued at 510 million.

Our 80% interest in the 510 million of additional communities will be paid through a combination of 209 million in cash and the pro rata assumption of 249 million of totaled secured debt on the communities, which I have an average interest rate of 5.0%.

NOI management fees for the total portfolio in 2011 are projected in the range of 60 to 63 million and occupancy is currently a solid 92%. As George mentioned, we anticipate the portfolio will generate average annual NOI growth after management fees of approximately 5%.

I’d like to take a minute to explain how the rent we were receiving on the 13 existing Health Care REIT communities being contributed to the partnership compared to the NOI we received post transaction. Our annualized rent on these 13 existing HTN communities is approximately 20 million. This compares to our estimated pro rata share of 2011 NOI on these communities of approximately 19 million.

We arrived at approximately 19 million of pro rata NOI by taking our 80% interest in the 23.5 million of 2011 NOI projected at these 13 communities. So, effectively we will trade approximately 20 million in annual rent for approximately 19 million of NOI. But most importantly, this NOI is expected to grow at a considerably faster rate at an estimated 5% per year versus the typical 2.5% annual rent increase we have received under a triple med lease structure.

Also, today, we announced the acquisition of a $143-million portfolio with a new senior housing operator. The portfolio includes six combination senior communities located in Indiana, New York and Connecticut. This transaction will occur in phases, we’ll acquire the first two communities in August for 47 million, three more communities in September for 70 million and the final community is expected to close in the first quarter of next year for 26 million.

We will assume 14 million of secured debt as a part of the September posing with an interest rate of 6.8%. This match release has a 15-year initial term and an initial yield of 8%.

Moving out to development, we delivered 217 million of development projects this quarter and started six new projects with a total of, minimum (ph), amount of 221 million. Three of these new projects are medical office buildings, which on average are 76% pre-leased, average 150,000 square feet in size and are projected to have a blinded stabilize yield of 8.5%.

We also started two combination rental senior housing projects with an expected average initial yield of 8.8% and one hospital for a new leading health fit care system with an expected initial yield of 9.9%. Including in these new projects, we currently have only 309 million of unfunded development commitments.

We believe our current development pipeline is comprised of high quality assets, which carry relatively little risk. More specifically, our current development pipeline is primarily comprised of six medical office buildings, which are 81% pre-leads, two medical facilities backed by investment grade health systems and three rental senior housing projects that will roll directly into multi-asset master leases secured by personal and corporate guarantees.

And now, before moving to financial results, I would like to touch on our same store performance. As John mentioned, our same store MOB NOI increased 0.2% in the quarter versus last year. Our same store revenue growth for the senior housing skilled nursing hospital segments increased to blinded 0.1% in the second quarter. This will be the last quarter that this number is impacted by few of the rent referrals and concessions provided last July. I think most importantly, excluding the impact from these operators, we had a strong quarter with same store revenue increasing 2.6% for senior housing, 3.4% for skilled nursing, 2% for hospitals and were up 2.9% for these groups combined.

These results were above our expectations, and I would point out, they were generally driven by some catch up in rents we receive due to positive CPI increases due the first half of this year.

Turning now to financial results, we saw strong sequential growth this quarter with normalize FFO per share increasing $0.05 sequentially to $0.80 and normalized FAD per share increasing $0.03 to $0.73.

Earnings on year-over-year basis were flat to slightly down as we continue to see the impact of our capital raising and de-leveraging efforts over the last 12 months. And I think most importantly, as I mentioned, as we move towards 2011, we believe our strong investment prospects put us in an excellent position to generate more significant earnings growth next year.

I will just briefly provide a few details on some of the normalizing and unusual items this quarter. First, we recorded a net gain of 3.3 million second quarter asset sales, which included three skilled nursing facilities, one medical office building and one senior housing community. These sales generated gross proceeds of 17 million for the quarter. We did incur a $7 million debt extinguishment charge as a result of our 139 million convertible senior note repurchase.

We reported 752,000 of transaction cost associated with the 293 million of completed investments and we incurred 150,000 of property operating expenses associated with the hospital health for sale that we expect to sell by year end.

And finally, we recognize 1 million of other income as a fee to this page of what’s related to an expected disposition that ultimately did not occur. I know regarding our dividend, as previously announced, the Board of Directors did approve an increase to the cash dividend for the quarter ended June 30th of $0.69 per share, which is a 1.5% increase versus the prior rate. This will be our 157th consecutive quarterly dividend payment.

In terms of our capital activity, we successfully issued an additional 152 million of 3% convertible notes during the quarter, which allowed us to repurchase more of our existing four and three quarters percent convertible notes, which were (inaudible) in 2011 and 2012. This transaction along with our first quarter convertible repurchased has enabled us to extend a total of 441 million of near-term convertible debt maturities through at least 2014. These convertible debt exchanges also reduce current cash interest expense and (inaudible) capital to make additional investments over the next few years.

Also, in June, we reopened our April unsecured senior note offering adding 150 million of notes priced deal, 6%. And finally, at the end of June, we completed our previously discussed HUD transaction generating 82 million of proceeds and an attractive rate of 5.1%.

As a result of all these activity, we had extended our average debt maturity from 4.4 years at the end of last year to 6.2 years today.

In terms of equity, we received over 19 million from our dividend reinvestment program this quarter to the issuance of 469,000 shares at an average gross price of about $42 and no shares are issued under equity shelf program this quarter. Our cash and liability now are over $1 billion at quarter-end. We are in excellent position to meet our near-term maturities and fund our remaining 2010 investment projections net of assumed debt.

Our credit profile remains strong. Currently debt-to-undepreciated book capitalization is 41%. And interest in fixed charge coverage are at 3.7 times and 3.0 times respectively. Secured debt remains low at only 11.5% of total assets at the end of June.

I will take just a brief minute now to discuss the accounting and reporting of our $817 million partnership with Merrill Gardens which we find to consolidate on our financial statements. Merrill Gardens’ 20% interest will be treated as non-controlling interest on the balance sheet and income statement. The additional 25 communities valued at $510 million that we will be adding to the portfolio, will be added to our real estate investments on the balance sheet. And we do anticipate providing a separate page in the supplement detailing the necessary components to arrive at NOI after management fees to everyone.

I will just briefly our 2010 guidance and assumptions. In light of the investments announced subsequent to quarter-end and the attractive opportunities, we continue to pursue, we are increasing our 2010 acquisition guidance by $800 million. This increase brings our gross investment guidance to a range of $1.8 to $2.2 billion for the full year. This included $1.5 billion to $1.8 billion of acquisition and joint venture investments, and $300 million to $400 million of funded developments.

We continue to forecast $300 million of dispositions, resulting in a new net investment forecast of $1.5 billion to $1.9 billion. As a result of our investment momentum and capital activity to-date, we are increasing the midpoint of our normalized FFO and FAD guidance and now expect to report normalized FFO in the range of $3.13 to $3.20 per diluted share, and normalized FAD in the range of $2.89 to $2.96 per diluted share.

Our expectation for net available to common stockholders has been updated to a range of $1.33 to $1.40 per diluted share as detailed in our press release. That concludes my prepared remarks. And operator, I think we’d like to open the call up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jerrall Gialty (ph) with Morgan Stanley).

Jerrall Gialty – Morgan Stanley

Gentleman, I wanted to get a better sense of the performance that you are seeing in your housing portfolio, specifically, I wanted to see what the occupancy trends had been for independent living versus assisted living?

Scott Estes

Hi (Jerrall) it’s Scott Estes. Breaking up a little bit, I think your question was general performance in the senior housing sector and independent living in particular. You know, we report senior housing on a combined basis since the majority of these facilities are combination independent living, assisted living et cetera. The answer is, the performance has been fairly stable. I think through the economic downturn, you saw a little bit of impact on occupancy but overall coverages have been very tight actually over the last two years. So, I think the senior housing portfolio has proven to be fairly resilient even through the downturn. We are optimistic about the growth potential as the economy hopefully continues to recover. And I think you can see the metrics in our supplement.

Jerrall Gialty – Morgan Stanley

Well, the question also involved assisted living. So, is assisting living turning better, or is it about the same as independent?

Scott Estes

I guess that the assisted living is probably marginally better, but again so many of our facilities are combinations, and operators have combinations of independent and assisted living. There’s not too much of a distinction.

Jerrall Gialty – Morgan Stanley

Got it. And the other question I had was, I was wondering if you can comment the lease spreads you are currently seeing for the MOB space?

John Thomas

I didn’t understand your question. This is John.

Jerrall Gialty – Morgan Stanley

I am trying to get a sense of like where the leasing spreads are trending for the medical office building space.

John Thomas

They’ve been better than expected this year, actually much better from budget and what we were seeing last year early in the market, but still lot of pressure in the economy.

Jerrall Gialty – Morgan Stanley

And my last question is – so you had – you bought two MOBs this quarter for an initial cash yield of 8.6% and in the first quarter you bought a portfolio of MOBs for 9.1%. So, I was wondering is this a reflection of your yields for MOBs are generally trending to, or is this more having to do with the quality, location of the assets?

John Thomas

These are high quality assets and again they are, I think all of the – well I think these are all off-market deals and built through relationships. There is a lot of competition out there for the auction, transaction, you know, the cap rates are running kind of – 7.5 to 8.5 cap rates, kind of all market transactions. But again these are reflections of high quality systems, long-term leasing in place and really just the efforts of our origination team.

Jerrall Gialty – Morgan Stanley

I guess going forward, have you seen more of a cap rate compression as the year has gone by?

John Thomas

Yes absolutely. There is a lot of capital out there facing medical office.

Jerrall Gialty – Morgan Stanley

Well that’s – it’s from me, thank you very much.

Operator

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

Dustin Pizzo – UBS

Hey good morning guys. Ross Nussbaum as well with me. Just looking at the Merrill Gardens deal, can you provide additional color on the terms of the management contract and perhaps what the fee is based of, how much it is? And then just also some of the assumptions behind the 5% projected NOI growth you guys talked about?

Scott Estes

Sure Dustin, and Ross. I think the pertinent items in terms of the management arrangement are the fee is essentially 5% of revenues and the initial term is seven years. And trying to think the – what’s your other question?

Dustin Pizzo – UBS

The assumptions to get to the 5% projected NOI growth?

Scott Estes

Sorry, I think the basic assumption is our portfolio has been a strong portfolio over time. We believe that the current occupancy is running a little bit below where it can trend over the next few years. So, we think that there’s an opportunity for some occupancy in margin expansion and you know we arrived at 5% NOI growth long term through what we believe is our moderate assumption case.

George Chapman

Dustin I would also add, Chapman here, that there is some pretty good pricing power in general in these high-end markets that go on with occupancy improvements. So, we are pretty bullish on it.

Dustin Pizzo – UBS

Okay, so there is not specific run rate for the assumptions that are behind that.

George Chapman

You know, it’s incorporated in our detailed models on a facility by facility basis, then I think the main point is we are comfortable saying we think the facilities will generate 5% NOI growth over time.

Dustin Pizzo – UBS

Okay, and then it looks like Merrill Gardens I guess in total owns or operates or manages about 56 properties. So, there’s 38 in the JV. What’s going on the 18 others? Are they going to find out another REIT or are those potential acquisition opportunities down the road that you talked about?

George Chapman

Some are in development, some are relatively new and occupancy is increasing. We hope all of them will – virtually all of them will end up being in our venture.

John Thomas

And I know that’s in their nine communities currently under development, and we do have exclusive rights to look at those and I believe their projected completions are over the next one to three years. If I could put the aggregate value, I think it’s about $300 million to $350 million of community value.

Dustin Pizzo – UBS

Okay, perfect. And I believe Ross has a follow-up.

Ross Nussbaum – UBS

Hi guys, have you mentioned the pricing contractually on that potential pipeline?

Scott Estes

No we have ranges.

Ross Nussbaum – UBS

On a yield’s perspective.

Scott Estes

We’ve talked in ranges, Ross. We will have to look at each asset, but we really are pretty confident that we are going to be Bill’s partner, Merrill Garden’s partner, for virtually all of the future development yields.

Ross Nussbaum – UBS

And on the management fee. I know you said 5% of revenues. How are they incentivized to keep their eye on expenses and is there any bumps to NOI?

Scott Estes

We think that the 80:20 partnership, both at a real estate and at the tenant level provides more than sufficient alignment. We think it’s some of the best alignment that we have seen actually for (inaudible) structures.

Ross Nussbaum – UBS

And then Scott, on a different topic, this is the same question I had asked you last quarter, I wanted to see if I can get some clarity. On the balance sheet, you have a real estate loan receivable $471 million, I know $78 million of that is on non-accrual. I guess we’re really trying to get our arms around whether or not at the end of the day, there is an impairment coming on that number and if you can give us any clarity around and I know you talked last quarter about I think half of it or maybe little more than half of it, you said you weren’t worried about it was with the operators (ph), what can you tell us about the given the $78 million is non-accrual. There is no disclosure there, so what can assume as to what’s going to happen with that, maybe when are those loans coming due and what happens when they come due?

Scott Estes

Sure Ross, I’ll give you some additional color, I would generally categorize that the current outlook for the loans that non-accrual bucket is encouraging, we do as always feel we’ve been fairly conservative by not recognizing interest here, but I would say we’re making some good progress. When you look at the loans in that bucket, they are basically six different operator relationships and essentially driven by either better performance in one case a potential transition to a new operator that we’re working on, would they assume the full loan and begin paying its current interest and potential payoffs, I feel like at least $30 million to $40 million of that $78 million number could move out of the bucket over the next few quarters and really again the biggest risk at this point is probably $20 million to $30 million of loans where we’ve chosen not yet to move forward on development projects.

And really as we evaluate the our options with a few of those projects those are the really to quantify the risk and so we determine that, that’s probably the best number for you to think about. But again I wouldn’t be (inaudible) and say still extremely small part of the aggregate company portfolio.

Ross Nussbaum – UBS

And the ultimate game plan with the loans I recall is only convert them into a long term lease, is that your game plan?

Scott Estes

It is just obviously on the table, yes. Again these are some projects that commence so we’re looking at our options. So we have – since we haven’t made the determination I would put those $20 million to $30 million in a limbo stage as we figure out the best option for those handful loans.

Ross Nussbaum – UBS

Right, but on the 4471 (ph), was the game plan on all of that converted into long term leases.

George Chapman

No Ross, George here, in some of those as you recall our loan, very good loans to a Florida nursing home operator in Ventas (ph), one liner and we find most of our loans to be very good and they helped to accommodate a very good series of relationships with high quality operators.

Scott Estes

Yes those numbers are the three operators that are in our top 10 that George referenced represent about $256 million of that $472 million totals about 55% of the total loan bucket.

Ross Nussbaum – UBS

Those loans are when (ph).

Scott Estes

I think if you look at the loan interest maturity schedule, its 2011 and 2013 for some of those larger ones.

Operator

Your next question comes from the line of Karin Ford with Keybanc.

Karin Ford – Keybanc

Hi good morning.

George Chapman

Good morning Karin.

Karin Ford – Keybanc

Just a few more questions on Merrill Gardens. Scott do you have an estimate as to how accretive you expect the transaction to be your FFO in 2011?

Scott Estes

I think the short answer is I think it would be flat to slightly accretive. You think about the total transaction value of $817 million, there is $381 million of debt on the properties at 5.4% and obviously we’ll use our line initially which makes it incrementally very accretive and so you use your theoretical cost of capital, but using an equity cost of something like 8% I think you can lend and assume it slightly accretive next year.

Karin Ford – Keybanc

Great, do you anticipate needing to issue equity later this year if the investment pace continues as you expect in your guidance?

Scott Estes

Karin, situation is we have a $1 billion available and based on our current guidance net of the terms debt we basically need between $350 to $750 million of capital. So we have current availability more than enough to meet our current pipeline but as always we’ll be watching the debt and the equity markets.

Karin Ford – Keybanc

Okay, helpful. Final question is just on the management contract with Merrill Gardens, you said it had a seven year term, do you guys – what circumstances could you guys terminate the management contract sooner than that? Are there any performance requirements?

George Chapman

Jeff Miller.

Jeff Miller

Yes, this is Jeff Miller. What I would characterize is typical kinds of performance requirements out of the management agreement.

Karin Ford – Keybanc

Okay, thanks very much.

Operator

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

Rich Anderson – BMO Capital Markets

Thanks, good morning everyone.

Scott Estes

Hi Rich.

Rich Anderson – BMO Capital Markets

If I could just play a little devil advocate here, you mentioned first class operator, sure they are, but you’re also mentioning the opportunity for margin expansion in occupancy increases. Can you just sort of tell me why there are first class operator but also there is more money on the table?

George Chapman

Rich, Chapman. We’ve dealt with Bill and his team for almost 15 years now. We’ve seen them turn around underperforming assets, we’ve seen them takeover troubled assets. We’ve witnessed their efforts during tough economic times, and we think that the only reason there is money being left on the table relates to the economy. And we’ve seen virtually everybody’s occupancies move down into high 80s and senior housing. (inaudible) and Bill and his teams portfolio have been affected that way as well but they are moving back up and I think they’re doing very, very well and they are performing very effectively and every asset is affected in some way by the economy.

Rich Anderson – BMO Capital Markets

Was there some corporate level or even why they wanted to do this or is it pure love for HCN?

George Chapman

Well I’m sure a lot of it was pure love for us. And while I think that there were a few corporate goals as well to rationalize their particular capital structure and other issues that relate to the Merrill family and their planning. But I think that’s as much as I would say right now.

Rich Anderson – BMO Capital Markets

Okay, are there any promoted interest opportunities for either party?

George Chapman

Yes, there is after a very high return to the venture, there is some opportunity for a promote – for Merrill Gardens based on performance.

Rich Anderson – BMO Capital Markets

Bigger picture, this is your first foray into RIDEA, you’ve mentioned maybe as much as 25% of your portfolio having some type of RIDEA structured to it. Is this perceived as a bit of a litmus test, see how it goes or you’re going full head up forward to look for other opportunities maybe within your portfolio with current operators? What is your game plan in the near term as it relates to RIDEA?

George Chapman

Frankly we have commented on RIDEA structures and the way we tend to think about RIDEA is as follows, we view relationship, good relationships as the way we build out portfolio. RIDEA is just one of the ways that we can form a good mutually beneficial relationship. At this point in time, there may be more good opportunities to do RIDEA structures in the IOAL (ph) space as occupancy had come down, occupancies have come down and we view the next two or three years as a period of very high growth. So yes we are looking at for that reason. Some of the operators and their portfolios are going to be perhaps candidates for that, others would not be and we would be better off just sticking with a typical operating lease with fixed increases.

Rich Anderson – BMO Capital Markets

Okay and last question. Do you feel like a $2 billion plus in terms of investment activity this year, you’re kind of tapped out in terms of annual action or how much bigger can it get on a sort of a annual basis in terms of investment activity?

George Chapman

You’ll recall when Scott and I have talked to and talked to the street about this, so we told you and all the other analyst that we had built a program that could do a $1.5 billion per year. I think possibly we can go higher than that annually, but again it depends on opportunities. We’ve added some great people. We have great capabilities and we could clearly go beyond $2 billion a year.

Rich Anderson – BMO Capital Markets

Okay, thank you.

Operator

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

Jerry Doctrow – Stifel Nicolaus

Thanks. Thanks we have some excitement here to the earnings season.

George Chapman

We’re glad to help.

Jerry Doctrow – Stifel Nicolaus

I want to just clarify a couple of details and first so when we think about the $60 million to $63 million of NOI, that sort of your projected sort of 2011 number, if that’s kind of a current run rate and we sort of add 5% to that. Just want to make sure I understand what’s kind of in place and what to assume?

Scott Estes

That is the projection for 2011 NOI after management fees Jerry.

Jerry Doctrow – Stifel Nicolaus

Okay, so with the ups build in, okay. and I guess in terms of the triple net rents, wanted to just clarify get a sense of how much of yours has floors, how much of is really affected by just very low CPI escalators, because I think you had made a comment that you actually catching up some rents for CPI, I mean does that 2%, 2.5% go low or because CPI has been so low, what’s your expectation sort of as we go forward?

Scott Estes

Hey Jerry, the short of it is about 80% or so our senior housing portfolio has at least compliant of the annual rent increase or then influenced by CPI and if you remember last year, really through most of last year that number was negative, so we kept rents flat and what we’ve actually found through the first and second quarter the year-over-year monthly CPI increase which is what it is for calculating increase there is range between roughly 3.5% at the high end and I think 2% or so at the lower end.

So we’ve actually received full increase or the need in some catching up of previous year’s flat rent impact. That is in part driving the higher same store performance this quarter.

Jerry Doctrow – Stifel Nicolaus

Okay, so at least the two – you would be comfortable with 2.5 on the triple net stuff easily?

Scott Estes

Yes.

Jerry Doctrow – Stifel Nicolaus

Okay, all right, thanks. And then just kind of coming back to the entrance fee and the stuff and lease. I was just wondering if you we get a little bit more color, you’ve provided some but there were like four properties in your sort of fill table, the one from like 0 to 50, 50 to 70, I was curious if any of that is entrance fee, maybe a little more color just on what’s going on incentives or what’s moving the entrance fees have been higher. I think you said they move from like 46 to 49 and then the strategy switched (ph) operators again just trying to get a little more color there?

George Chapman

On your unstable progress question. Yes I think that is important and we did have four properties move up in occupancy as you referenced in our supplement and two of those four were actually entrance fee communities in Florida. The other was a combination of rental senior housing property and the other was a free standing dementia building. We are seeing nice momentum, our largest operator and two operators in the entrance fee world are doing very well, as we mentioned part of our optimism is really based on that sequential improvement.

As Chap mentioned, we’re ahead of budget in terms of entrance fee moving, above entrance fee and rental components increased occupancy 3% this quarter and if I think important measure if we’re going to think about is as we looked at when we think the majority of those entrance fee communities can stabilize. We currently project between about 1.5 to 2 years and the vast majority of the entrance fee portfolio we think will meet our stabilization criteria of a blended 80% occupancy.

So we’re actually getting encouraged and we’ll look at the end of the year based on where we’re at but again as we mentioned we think rents are moving up in direction.

Jerry Doctrow – Stifel Nicolaus

Okay and then just on Stratford I think it is who is the new operator and jus what was going on there?

George Chapman

Jerry it’s referencing community in Kenwood, Ohio that is one of the true, we think the (inaudible) real update in its market if the project that is just come out of construction and in July we transition this property to Senior Star who is a high quality senior housing operator that’s already in our portfolio. They will be running that community as a rental model under we think it’s an attractive long term lease featuring an incremental growth revenue component which could enhance future returns.

So we’re happy to – team did a good job I think putting resolving that situation and I think probably from a metrics perspective the number we would share is obviously, we’re generalize not a home run but we think based on conservative cap rate assumptions we can still get nearer of 7% to 8% on that asset.

Jerry Doctrow – Stifel Nicolaus

Okay and wasn’t the entrance fee the move to rentals that what you do is part of that?

George Chapman

That’s correct. This is an entrance fee that we move to a rental model.

Jerry Doctrow – Stifel Nicolaus

Okay. All right. I think I am good for now. Thanks.

Operator

Your next question comes from the line of Tayo Okusanya.

Tayo Okusanya – Jefferies & Company

Yes, good morning. Just back to Miller Gardens, its already still well run occupancy at 92%, one, could you give us a sense of what the operating margins are right now and then two, when you kind of look back at the economic boom, five or six years ago, could you give us a sense of what peak occupancies and peak margins were back then?

Scott Estes

Yes they were.

George Chapman

John Getchey, go ahead and answer the question.

John Getchey

Yes the occupancy has always been, what was the year you were looking for they were ‘09, there were 90%, it was 91% 2009, 93% 2008 and currently running at 92% today. And as far your operating margin question, it’s probably around 35% or so.

Tayo Okusanya – Jefferies & Company

35% today?

John Getchey

Yes.

Tayo Okusanya – Jefferies & Company

What about in the peak years?

John Getchey

We kept at – it’s always circling down 35%.

Tayo Okusanya – Jefferies & Company

Okay, so what would the upside come from then, I guess its occupancy kind of a peak occupancies right now and margins are kind of like a peak margins. What does the 5% NOI growth come from?

Scott Estes

Generally I think yes when John’s giving general numbers Tayo, the 91%, 92% range of occupancy in our (inaudible) can grow to 95% for this portfolio. And he said they were current EBITDA there in the kind of 30% to 35% range is somewhere in the middle there. There is definitely a few percentage points of EBITDA margin expansion from where the numbers are now in these guys have always been very good operators over a time. So we’re comfortable as the economy improves. Clearly assets like these will have some of the best pricing power in their markets.

Tayo Okusanya – Jefferies & Company

Do you have any concern at least near term about somewhat of the portfolio, one being independent living in California that has a week housing backdrop?

George Chapman

We certainly look at that and we know that the economy is probably having the greatest impact on independent living but we think that cyclically that we have some room to move up at this point.

Tayo Okusanya – Jefferies & Company

Okay, I appreciate that, and then just going back to the developments, the one CCRC that you guys have not determined the development yield on yet. Any reason why?

Scott Estes

That was in the (inaudible) facility that I detailed through Jerry to response.

Tayo Okusanya – Jefferies & Company

Okay. And then the deferred rents on the other which can be open CCRCs, it sounds like you’re expecting to get some of that back in 2011 as we – how much you’re expecting back and how soon that could faster happen?

George Chapman

We do think we are going to increase rents on the CCRC portfolio and we’re going to look at the remainder of the year before making hard determination.

Tayo Okusanya – Jefferies & Company

Okay. One more questions, life sciences joint venture, anything changed in regards to that, you guys were kind of seeing the 20% leasing spread you were expecting that will generally be 5% NOI growth?

John Thomas

Yes, Tayo its John. What we’re seeing in the market and some of the relation there really above our expectations. So the numbers you quoted we’re very comfortable with.

Tayo Okusanya – Jefferies & Company

Okay, well one big transformational transaction in first quarter, second one in second quarter, what should we be expecting in the third quarter?

George Chapman

We get board easily (ph).

Tayo Okusanya – Jefferies & Company

I hear you, thanks a lot guys.

Scott Estes

Thanks.

Operator

Your next question comes from the line Todd Stender with Wells Fargo Securities.

Todd Stender – Wells Fargo Securities

Hey thanks guys, I apologize you already answered these questions. The other transaction you announced were $143 million, who was the seller on that, was that an existing tenant?

Scott Estes

It was existing, it was an operator fine portfolios of ours, so just great sale lease back transaction.

Todd Stender – Wells Fargo Securities

Okay.

Scott Estes

They were not in our portfolio but we had a long term relationship and has worked with them back and the early 90s and their portfolio had matured and they were looking for growth partners so we were able to acquire that portfolio from them.

Todd Stender – Wells Fargo Securities

Okay. So the operator is going to stay the same, you are not changing out the operator?

Scott Estes

Correct.

Todd Stender – Wells Fargo Securities

Part two of that, what factors contribute to the closing dates at least on one of the properties getting stretched into the first quarter of next year?

Scott Estes

Some of it is the tax considerations and some of it are related to debt assumptions.

Todd Stender – Wells Fargo Securities

Okay. That’s it from me. Thank you.

Scott Estes

Thanks Todd.

Operator

(Operator Instructions) Your next question comes from the line of Rob Maine with Morgan Keegan.

Rob Maine – Morgan Keegan

Thanks, good morning. Most of what I had its been answered, so I’ve just got a little odd man question left, and that is skilled nursing portfolio, there have been, with that kind of a flurry of reimbursement issues that come up FMAP and Medicare rates for next year and proposed therapy cuts and all that stuff. Am I correct in assuming that when you look at this netted out, you don’t see any significant impact on either your coverage or your appetite for that asset class?

Scott Estes

I think that’s correct. I do think it’s a net user basically right now.

Rob Maine – Morgan Keegan

Okay, that’s all I have. Thanks.

Scott Estes

Thank you.

Operator

You have a follow-up question from the line of Tayo Okusanya with Jefferies & Company.

Tayo Okusanya – Jefferies & Company

Yes, just two quick questions. One along Mr. Maine’s question, although you expect it to generally be neutral in regards to Medicaid, are there any particular states where the outcome was somewhat worse than you expected?

Scott Estes

No big – honestly so many of the state budgets are still unfolded this point, and we heard some encouraging news out of the potential for increasing FMAP through the next first couple of quarters of next year and it looks like that’s going to move to the house and later this week as I understand it but again the bottom line is our school nursing facility coverage is 1.72 times among the highest in the industry and based on all the changes that we don’t see a lot of or any operators who have significant issues in light of the Medicare, Medicaid pricing changes that are on the table.

Tayo Okusanya – Jefferies & Company

Got that, all right. I appreciate that but then just one more question. I appreciate your patience, I know you had discussed this just a few minutes ago, but the CPI related triple net leases, you said and there was a certain catch up you were getting right now which is why the increases were between 2% to 2.5%. Could you just talk about that again real quick please?

Scott Estes

Sure Tayo, you can see most of our leases would have, the typical 2.5% of approximate annual increase and as you can see even see it in some of our independent and assisted combination operators we saw as much as kind of the 5% to 6% year-over-year increases when they’re leases came up during the first half of this year because effectively what was happening was last year rents were held slight while CPI was negative and then the CPI has come back positively, we’ve been able to not only get the normal annual increase but catch up some of the rent that should have been increased in the prior year.

Tayo Okusanya – Jefferies & Company

Okay, so that’s something works. Okay, it sounds good. Thank you.

Scott Estes

Yes.

Operator

Your next question comes from the line of Karin Ford with KeyBanc.

Karin Ford – KeyBanc

Hi, I just had a follow-up on the two post quarter acquisitions. Are the two senior housing portfolios in the Merrill Gardens deal and the other $143 million deal similar, so that – if we sort of compare the cap rates, the cap rate and the lease rate basically between those two deals. Would that be a good measure of what you might consider to be the premium you’d need to pay to do a RIDEA deal versus a triple net deal?

Scott Estes

How would you characterize the relative assets Chuck are there significant difference.

Charles Herman

Quality I think there are of similar quality and similar mix, so I think they’re reasonably the same.

Scott Estes

As far as the differential, we’re doing a right deal versus doing a straight acquisition. I think it potentially is one property I think it could be larger spreads depending upon the growth in the RIDEA portfolio that maybe out there. Even IRRs too – I mean some of our potential IRRs on a typical triple net be on senior housing maybe more in the 9.5 to 10 range and we think we can get in excess of that based on some pretty reasonable, what do you think reasonable assumptions and in terms of growth in the Merrill Gardens portfolio as well as terminal cap rate actually using in cap rate that’s kind of higher than the growing cap rate. We still think we can just kind of at least 10% to 11% potentially and that’s kind of another way we think about the value added proposition.

Karin Ford – KeyBanc

Helpful, and then just finally, do you anticipate within the current structuring of the deal that there will be any tax leakage or do you think it will be sort of tax efficient the way you’ve got it structured?

Jeff Miller

This is Jeff Miller. There is inevitably some level of tax leakage because you’re working to a TRS however the way we have structured, I think we have done a pretty good job of minimizing that.

Karin Ford – KeyBanc

Okay, thanks very much.

Operator

There are no further questions at this time. Mr. Chapman, do you have any closing remarks.

George Chapman

I have no closing remarks. I just want to on the behalf of the management team thank people for participating in the call and to advise you that Scott will be available for any follow-up questions. Thanks very much.

Operator

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

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