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Health Care REIT (NYSE:HCN)

Q4 2010 Earnings Call

February 16, 2011 10:00 am ET

Executives

John Thomas - Executive Vice President of Medical Facilities

Scott Estes - Chief Financial Officer and Executive Vice President

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

Charles Herman - Chief Investment Officer and Executive Vice President

Jeffrey Miller - Executive Vice President of Operations and General Counsel

Analysts

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

Jonathan Habermann - Goldman Sachs Group Inc.

Omotayo Okusanya - Jefferies & Company, Inc.

Robert Mains - Morgan Keegan & Company, Inc.

Richard Anderson - BMO Capital Markets U.S.

Ross Nussbaum - UBS Investment Bank

Michael Mueller - JP Morgan Chase & Co

Operator

Good morning, ladies and gentlemen and welcome to the Fourth Quarter 2010 Health Care REIT Earnings Conference Call. My name is Christie and I'll be your operator today. [Operator Instructions] Now, I would like to turn the call over to Jeff Miller, Executive Vice President, Operations and General Counsel. Please go ahead, sir.

Jeffrey Miller

Thank you, Christie. Good morning, everyone and thank you for joining us today for Health Care REIT's fourth quarter 2010 conference call. If you did not receive a copy of the news release that was distributed last evening and this morning, you may access them via the company's website at www.hcreit.com. We are also holding a live webcast of today's call, which may be accessed through the company's website.

Certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that 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. I will now turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT. George?

George Chapman

Thanks very much, Jeff. Good morning. It is a particular pleasure to report to you today. In 2010, our well-positioned platform, driven by our relationship investment strategy, generated a record year of investments. It only seems appropriate that in our 40th year, we invested an unprecedented $3.2 billion with leading senior housing operators and health systems. And year-to-date, in 2011, we have announced an additional $1.3 billion of high-quality investments.

Relationships with best-in-class operators differentiate our company. This strategy has produced excellent portfolio results and in turn will drive strong and accelerated FFO and FAD growth for 2011 and into the future. Although we faced challenging economic conditions in the last several years, we remain steady and disciplined by preserving liquidity and completing all committed investments. During the same period, we focused on deepening existing relationships and developing new ones with senior housing operators and health systems. Our capabilities were strengthened by adding strategic, knowledgeable and experienced employees to our team. We also enhanced the full-service capabilities that make us a value-added partner. And as we've entered into RIDEA partnerships that will enhance our organic growth potential, we have added key personnel to help us in managing those relationships and adding value to the partnerships.

During the last 40 years, Health Care REIT has created a foundation of relationship and trust with senior housing operators and health systems. Year after year, a large percentage of our investments are with existing relationships. In 2010, over 90% of our investments were off-market, providing Health Care REIT and our partners an opportunity to negotiate win-win capital structures.

In our press release distributed yesterday, we announced four major investments with Benchmark Senior Living, Brandywine Senior Living, Senior Star Living and Silverado Senior living. These new investments included an expansion of our relationships with key portfolio companies, Senior Star and Silverado. We also formed new and important relationships with Brandywine and Benchmark, two highly regarded operators in the Northeast. The Senior Star, Silverado and Benchmark investments have joined Merrill Gardens as partnership structures formed under RIDEA. The Brandywine investment can be converted into a RIDEA structure after the first three years of the lease, subject to specified performance measures. All of these partnerships offer potential future external growth, with the right of first refusal on future investments. It is also important to note that all of these partnerships offer internal growth opportunity through occupancy, particularly the Silverado and Senior Star portfolios, with properties currently in lease up. In aggregate, the occupancy of these four new partnerships is 86%, leaving significant room for upside. These best-in-industry partnerships result in a portfolio of extremely high quality of assets in high barrier to entry markets.

Additional information about these new structures and partnerships is included in our February 15 press release and on our website. The partnerships extend the company's strategy of capitalizing on favorable fundamentals in the senior housing industry by investing with innovative operators who have a track record of quality care, profitability and growth. The company anticipates earnings accretion in the short run and growth in the long run. We are quite enthusiastic about these investments and relationships and look forward to being a value-added partner.

During this period of new partnership development, we also continue to grow existing relationships with our highly valued, long-standing operator partners, including Emeritus, Brookdale, Capital Senior Living, Life Care Centers of America and a numerous and notable regional operator partners. In fact, we now have 63 senior housing and care operators in our portfolio, a reliable and high-quality platform for investment and FFO growth.

In our Medical Facilities division, we made investments totaling $1.2 billion in 2010, with major investments in 17 medical office buildings master leased by Aurora Health Systems, an A-rated, highly-regarded Wisconsin health system. We also invested with Forest City in seven first-class Life Science buildings in Cambridge, Massachusetts. Late in the year, we completed investments in five Florida Medical office buildings and 17 medical office buildings, primarily in the Midwest. We now have investments with 46 health systems with the potential to produce future investment opportunities.

This relationship investment strategy has resulted in a strong, high-quality portfolio that we believe is one of the best in the country. Our aggregate portfolio of coverage is 2.12:1, which we believe to be the strongest coverage in our sector. And following my remarks, Scott Estes will provide additional highlights of our portfolio metrics.

During the past four years, our relationship investment strategy has created a 16% average annual return for our shareholders. And the current environment has confirmed Health Care REIT's position as partner of choice in senior housing and a key player in the medical facility sector. Our guidance for 2011 provides for a range of 6% to 9% FFO and 6% to 10% FAD growth, excluding the benefit of future acquisitions. The 63 senior housing and care operators and 46 health care systems within our portfolio and the numerous rights of first refusal for future investments will undoubtedly drive a significant additional external growth. The RIDEA partnerships and life science investments are expected to provide strong organic growth. And these diversified growth opportunities position Health Care REIT to drive significant FFO and FAD growth and result in shareholder value, not only in 2011, but for many years to come. These relationships results and returns could only have been produced by a talented team, and I'd like to take the opportunity now to formally thank our committed employees for their tremendous efforts in producing these accomplishments.

Lastly, I'm pleased to announce that Health Care REIT will host our first ever Investor Day at our newly renovated headquarters in Toledo, Ohio, on May 19 and we look forward to the opportunity to showcase our company's industry-leading capabilities, as well as some of our key operator partners. And with that, I will now turn to Scott Estes, our CFO, for a brief financial and portfolio overview. Scott?

Scott Estes

Thanks, George and good morning, everyone. As George discussed, we are very excited about the recent additions to our portfolio, and our expectations that they will drive meaningful earnings and dividend growth for the company over the next several years. We were also pleased with the fundamental performance of the portfolio during the fourth quarter. We try maintaining coverage at an all-time high and strong same-store NOI growth that ranged between 2% and 5% across all of our asset segments. We made a decision to raise a significant amount of capital during the fourth quarter, which allowed us to form the additional partnerships announced last evening. These are all strategically significant partnerships with excellent operators and high-quality health systems that will help generate more significant earnings and dividend growth in 2011, 2012 and beyond. We believe our enhanced growth potential as a result of these investments more than offsets the minor near-term dilution, which occurred as a result of raising the capital early in completing the majority of our investments during the last week of December.

Turning now to the details, as George discussed, we had a very successful year on the new investment front, completing $3.2 billion in total during 2010, which included a record $1.6 billion in the fourth quarter. In addition, the $1.3 billion of investments announced in 2011 to date, represent excellent additions to our portfolio and position us to generate FFO growth of at least 6% to 9% this year. Turning to portfolio performance, first in our stable, Senior housing and Care portfolio continues to perform well. Senior housing payment coverage remains at the solid 1.54x with occupancy increasing 1% to the current 89% level. Skilled nursing payments coverage increased five basis points sequentially to its historical high of 2.42x, with current occupancy of 85%.

We generated strong same-store NOI growth rates within both the senior housing and skilled nursing portfolios during the fourth quarter. Our same-store senior housing NOI increased 2.9% versus last year, while our same-store skilled nursing NOI rose nearly 5% year over year. We also continued to see some nice progress at our entrance fee properties. As a result of this continued progress, on January 1 of 2011, we increased rent on the original nine communities operated by senior living communities by 8.3% or 50 basis points to 6.5%. These properties have a current investment balance of approximately $400 million. The 8.3% annual rent increase on these properties translates into a blended 2011 annual increase of 5.2% across our entire $653 million entrance fee portfolio.

Next, I'll just briefly discuss our senior housing operating portfolio, which is comprised of our RIDEA partnerships. As of December 31, the operating portfolio consisted of our previously completed Merrill Gardens partnership and the recently announced Senior Star partnership, which closed on December 31. And we have included some additional disclosure regarding the operating portfolio for the first time on Page 24 of our supplement.

Moving now over to the medical facilities portfolio. First, in regards to our hospital portfolio, fourth quarter stable payment coverage improved one basis point to a strong 2.7x overall. We also experienced significant 4% same-store NOI growth in our hospital portfolio during the fourth quarter versus last year. Our medical office portfolio had another strong quarter and finished the year exceeding our expectations. Occupancy increased 10 basis points sequentially in the quarter to end the year with occupancy over 93%, while our retention rate during 2010 was a strong 85%. We also generated solid same-store growth in our MOB portfolio, as fourth quarter same-store cash NOI increased 2.1% year-over-year.

Our life science portfolio also continues to perform very well, as we saw a nice sequential same-store NOI increase of 4.1% versus the third quarter as depicted on Page 30 of the supplement.

Turning now to financial results, we reported normalized FFO per share of $0.75 for the fourth quarter and $3.08 for the year, while normalized FAD per share was $0.68 for the quarter and $2.84 for the year. Our results came in below guidance as a direct result of the $950 million of capital raised during the quarter, which is not included in our previous forecast and the fact that the vast majority of fourth quarter investments occurred during the last week of the year. More important, this activity sets us up for significant growth in 2011 and puts us in a strong capital position to complete the 2011 transactions announced today.

Regarding our dividend, the Board of Directors recently approved a quarterly cash dividend rate of $0.715 per share or $2.86 annually, commencing with the May dividend. This represents a 4% increase versus the previous rate.

I'll now provide some additional details regarding our fourth quarter capital activity. The $450 million long tenure unsecured note offering completed in November enabled us to extend our weighted average debt maturity to nine years. In terms of equity, in addition to our 11.5 million share equity offerings in December, we issued 516,000 shares under our Dividend Reinvestment Program at an average net price of $46.50 per share, generating $24 million in proceeds. No shares were issued under our equity shelf [ph] (0:17:52) program during the quarter. At this point, our credit profile remained strong through December 31, with debt to undepreciated book capitalization of 45%, and interest and fixed charge coverage of 3.4x and 2.8x respectively.

Finally, I'd like to review our 2011 guidance and assumptions. First, I would like to point out one change regarding our guidance methodology beginning in 2011. We will no longer assume additional investments in our guidance beyond what has been announced to date. In addition, we are discontinuing the investment press release that was typically issued about 10 days after quarter end that provided investment volumes but limited detail regarding expected returns on those investments. Instead, we plan on reporting investment results for the previous quarter at the time of our earnings release. This will enable us to include more detailed disclosures, such as cap rates, initial yields and growth potential and allow us to provide more details on the rationale behind these investments on the earnings calls.

As detailed in the earnings release, we expect to report 2011 net income available to common stockholders in the range of $1.02 to $1.12 per diluted share. We anticipate 2011 FFO in the range of $3.25 to $3.35 per diluted share, representing strong 6% to 9% growth. Our 2011 FAD expectation is a range of $3.01 to $3.11 per diluted share, which also represents a strong 6% to 10% increase over normalized 2010 results.

Our 2011 investment guidance assumes only the $1.3 billion of acquisitions and joint venture investments announced through today, and $212 million of funded development on the projects currently under construction. Also included in guidance is our expectation for approximately $300 million of dispositions in 2011, which are weighted towards the front half of the year. And finally, we are projecting development conversions for projects currently under construction of approximately $480 million, with an average initial cash yield of 9.1%.

As George explained earlier, our overall portfolio mix is now an excellent balance of higher potential growth opportunities, supported by the more stable 2% to 3% increase as expected out of our triple net lease portfolio in medical office buildings. Including the transactions announced today, we expect that about 1/4 of our portfolio has the potential to generate internal NOI or rent growth at 5% or greater over the next several years, while the remaining 3/4 is expected to average the more traditional 2% to 3% growth per year. The higher growth vehicles in our assumptions are the senior housing operating assets, representing 22% of the pro forma portfolio and our life science investment of 3% of the portfolio.

In regards to specific portfolio segments, in our triple net senior housing and hospital portfolios, we are forecasting solid same-store NOI growth of approximately 2% to 3% in 2011. As stated earlier, our senior housing operating portfolio will represent approximately 22% of our total investments, including the recently announced partnerships. We anticipate this portfolio will generate a 2011 NOI yield after management fees of approximately 7%, and it's positioned to grow approximately 5% to 6% over the next several years.

In our medical office portfolio, we're expecting that occupancy will stay in the 93% range, while same-store cash NOI growth is forecast to increase approximately 1% to 2%. In addition, we have only 6% of the portfolio rolling over in 2011 and we are forecasting solid tenant retention of approximately 80% this year. Next, we expect that our life science portfolio will continue to perform well in 2011. The first two leases that came up for renewal, representing about 15% of the total life science portfolio square footage were renewed at average rate increases in excess of 35%. Since these new leases are expected to commence later this year, we are expecting average NOI growth roughly of 2% to 3% for the portfolio this year. However, we do expect to be able to achieve NOI growth in the life science portfolio in excess of 5% over time as a larger number of leases begin to roll beginning in 2012.

Our G&A forecast is approximately $69 million for 2011, representing approximately 67 basis points of assets this year, including the acquisitions announced today. As George mentioned, we have continued to add a number of outstanding professionals to our team as we manage the significant growth in our portfolio.

And finally, I'll take just a minute to discuss our capital needs as we enter 2011. As of December 31, we have almost $1 billion of cash and line of credit availability. And as discussed, we have announced growth investment of $1.5 billion this year. So approximately $1 billion of this $1.5 billion growth investment capital need is expected to come from the following sources: First, we will assume approximately $613 million of secured debt associated with our recently announced 2011 investments at a blended rate of 5.5%. Second, we expect $300 million of asset sales weighted towards the first half of 2011. And third, $90 million is expected through our Dividend Reinvestment Plan. This leaves only about $500 million that's not spoken for. So given our cash and line availability here of nearly $1 billion and the $400 million in committed bridge financing we obtained as discussed in our press release, we believe we're in excellent capital position and have adequate liquidity to meet our current 2011 investment needs. With that, George, that concludes my prepared remarks and operator, I guess we'd like to open the call for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jay Habermann with Goldman Sachs.

Jonathan Habermann - Goldman Sachs Group Inc.

A question for George or Scott, I guess as you look at the balance sheet, and Scott you just walked through the details. You are in pretty good shape on the financing side. But if you look at your assets, they're up about 50% year-over-year. Can you just talk broadly about the pipeline of what you're looking at today and what you think the HCN platform can handle, I guess in terms of new deal volume for 2011?

George Chapman

Jay, as Scott indicated, we're not giving a guidance. We continue though because of the relationship financing program, investment program to see all the deals that are out there. We're seeing probably more senior housing opportunities right now than say medical office buildings or hospitals or the like. And in terms of what we think we will do, it all comes down to the quality of the operator and the quality of the portfolio. We're reviewing a number of opportunities right now but we're not really going to say much more than that at this time.

Jonathan Habermann - Goldman Sachs Group Inc.

And then you mentioned life science. I know 3% of the portfolio. Can you talk about the opportunities you're seeing there today because it's certainly one of the areas you mentioned in terms of growth?

George Chapman

I'll just start and then maybe I'll ask John Thomas to comment on that. We have looked at a lot of opportunities with Forest City. It's a very collaborative arrangement and we have actually pursued several. And we will pursue life sciences if they are particularly attractive like our current investment in Cambridge. John, some comments?

John Thomas

Just to add to that, this is John Thomas. We have looked at opportunities on both coasts in the core life sciences corridors and we expect to grow that when we find best-in-class assets located near universities and core tenants. So, we expect to grow.

Jonathan Habermann - Goldman Sachs Group Inc.

Maybe just switching back to senior housing, in terms of Benchmark and Brandywine, can you talk a bit about rent coverage, I guess more on the Brandywine side? And then in terms of I guess just potential rent growth and where occupancy is for each of those portfolios?

George Chapman

We're going to be reporting growth and as a part of the four operating senior housing operators. And we're probably not going to give that much specific detail on each one of our senior housing operators every year until we maybe refine our methodology for doing so. But both Brandywine and Benchmark have a very attractive occupancy right now. They've done a great job during the downturn. They have several percentage points of opportunity to grow occupancy and they certainly have some real pricing power in a very tough area to build in and to develop in. So Scott, do you want to add anything to that? We're very pleased about Brandywine and Benchmark. We think that these are some of the best operators in the country, with some of the best assets in very tough markets and we're looking for a real significant growth there. Our approach to the four though is that we're going to be able to grow our operating platform more in the 5% to 6% range annually and they're certainly going to be great contributors.

Jonathan Habermann - Goldman Sachs Group Inc.

In terms of RIDEA in total, you said 22% of the total portfolio. How large could that grow over time? Could you mention Brandywine could, I guess convert after three years?

George Chapman

Yes, we frankly hope they will. Our expectation would be that they would be able to convert in three years or perhaps even sooner, depending on what the circumstances are and how Brenda and her team sees the opportunities. Certainly, we talked in the past about 25% to 30% or so, perhaps our sort of steady-state RIDEA platform. And at this point, I would think that, that would be appropriate.

Operator

Your next question comes from Yama [ph] Gailan [ph] with Bank of America.

Unidentified Analyst

I was curious how you were thinking about disposition, and I know as pricing gets competitive, would you consider more than currently the $300 million you have targeted?

George Chapman

What was the question, dispositions? We really have -- we undertook a process about four years ago when there were -- we are all focused on liquidity. And it was an opportune time to sort of jump start the disposition process that would otherwise take seven to eight years. So we're getting toward the end of any dispositions, for example, relate to more stand-alone Medicaid-oriented skilled nursing facilities and we have some loans that are due to be repaid this year and next that we have talked about it at undue length in previous calls. So, I think we're getting toward the end.

Operator

Your next question comes from James Marlow with Sandler O'Neill.

Unidentified Analyst

I want to take a sort of a different tack on the investment pipeline question. You have talked about in the past $5 billion to $6 billion investment pipeline. Recently, it's been more, you said sort of 60:40 senior housing versus other facilities and 90% with existing relationships. Can you just talk about how that shifted given the acquisition volumes you completed in the fourth quarter and now into 2011?

George Chapman

As you point out, we're doing about $5 billion. We did $3.2 billion last year. We've announced $1.3 billion this year and we frankly think that the pipeline is probably going to refill and it's probably going to be oriented a bit more toward senior housing as I said earlier than the medical facility side. But I would point out we did $1.2 billion in the medical facility side and all of the noise and whatever about how well we did in senior housing, I'm real pleased about John's group and what they've done. But I think it sort of remains the same. We're just not in a position right now to tell you it's going to be another $2 billion or $3 billion or whatever the number is. It's a little hazier today than it was going into the second half of last year.

Unidentified Analyst

And then you look at on the construction side in 2011, the development balance is going to come down as you deliver projects. Are you seeing more opportunities to refill the pace of new construction and is the 6% to 8% that you talked about now, is that sort of a target or should we think about that more as an upper range of where you would be comfortable with that exposure?

George Chapman

I think that's probably an upper range. And the talk about development about two years ago, when the markets sort of fell apart and we had higher than normal development. This is where we tend to be in our development pipeline and most of those will be in a substantially pre-leased and medical office buildings with great systems or some outpatient facilities connected to, related to, affiliated with the really good health systems, as well as some senior housing generally as part of a master lease. So, we will do development. We're geared up to do it. It's particularly important in the health system arena where they have to develop new medical facilities that are appropriate for the customer and are appropriate for the outpatient nature of procedures today. But I think that's right. 6% to 8% is probably the high end.

Unidentified Analyst

My last one here, the G&A looks like it's gone up quite a bit. Is that just simply a product of the expanded team given the investment activity in monitoring the new relationships? Are there are other items that are on top of that, either related to the RIDEA structures or something else?

George Chapman

I'll make a couple of comments and then I'm going to turn it over to Scott to follow up on some of his comments he made in his initial remarks. But generally, we have tried to stay ahead of the game in terms of bringing in top-flight people as I said in my remarks. We brought in a lot of people in the medical facilities area, including people who are quite good and add to our property management team, as well as our development group. And then, as it relates to senior housing, Chuck has been very active in bringing in folks like Stephanie Anderson to add to our resources there. And the effect has been very good. We also said that with the RIDEA structures, we are going to bring in a team that will add value. We've already added two to three people and are looking to add two to three more people as well. We think that the way the Health Care REIT world is evolving, is that we're really a complete company, instead of, hey we're not just an entrepreneurial financiers. We're full-blown companies, with top infrastructures and top people and that's how we position the company. Scott, do you want to add anything?

Scott Estes

Yes, James. I think I just said, my answer to your question would be really no. There's nothing beyond just the infrastructure improvements that we really begin as we've embarked on this initiative to grow the portfolio very significantly, really beginning in 2010. And obviously, going in continuing into 2011. Obviously, moving from roughly $6 billion in assets now to pro forma in excess of $10 billion, we've started, as George mentioned, staffing for the growth beginning probably middle of 2010 and when you kind of just look at where the numbers play out, you have the high quality team in place. It's virtually all staffing related. And I think as a percentage of either assets or revenue, it's flat to even slightly down based on the aggregate portfolio.

Operator

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

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

A couple of things. On guidance, I guess this is Scott's question. What do you assume on the capital raising side? Any equity offerings? I guess just the stuff you mentioned coming from the DRIP. Just want to clarify that side of it.

Scott Estes

Sure, Jerry. I think the point of where we're at from a capital position shows that we have a lot of flexibility here entering 2011. But I guess for modeling purposes, we've always assumed the blended mix of 45%. That 55% equity kind of our standard in terms of incorporating and providing guidance to you all.

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

And I think it was probably just some rounding but I just wanted to sort of clarify a couple of things that you went through the capital needs end. You had talked about $1.5 billion. I think that's what you said unless I misunderstood you. You really talking about the stuff that has been funded or committed to the $1.3 billion for the first part of this year.

Scott Estes

Yes, the aggregate of the announced $1.3 billion of acquisitions and joint venture fundings plus $200 million of projected development fundings from the projects that are underway this year.

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

Just any more rationale just about sort of not assuming sort of investments. You've done that sort of historically in terms of your future guidance.

Scott Estes

Sure. We thought a lot about it. We've spoken at length about our pipeline. I think George gave some color. Obviously, we still feel like our position and our investment opportunities are strong and a lot of it will be recurring business from our existing portfolio of senior housing operators and health systems. I guess the short of it is we feel like it will be easier to just communicate the investments as they come through as opposed to proposing some level of hypothetical guidance and then hypothetical capital raises. In our opinion, it will just be easier to talk to you as they come through.

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

Just one or two more for me. The FFO guidance from what we expected, FAD was a little bit lower. Are there any capital CapEx funding needs or anything else that's sort of changed on the FAD side that we should be thinking about? Particularly as you get into RIDEA, there's some stuff in lease up, do you have CapEx per unit or something like that we should be thinking about?

Scott Estes

Sure. There's obviously some more CapEx that are included in the FAD guidance and it's a blend of really what we're projecting in our operating portfolio, combined with what we project in our medical office portfolio. And I think when you put it together, it's probably in the $30 million area in aggregate. I think we're projecting, correct me if I'm wrong, pretty typical, about $1,250 per unit of CapEx in the operating portfolio would be a rough estimate.

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

And there's no big, on the MOB side, there's no big tenant roll-over or extra TIs that's running about where it was on CapEx.

John Thomas

Yes. This is John Thomas. That's correct. We got a very low rollover this year and next. So that's consistent with 2010 on those numbers.

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

Last thing for me, I was wondering how you think about, and I've actually didn't get to calculate cost per unit, but cost per unit on the stuff maybe you bought in the new senior housing stuff that you announced? And how do you think about replacement costs on those properties?

Charles Herman

As far as replacement costs, we're seeing in these types of markets, they're very difficult to build in, very difficult to construct and you expect in the New England and mid-Atlantic states to be at least $250,000 to $300,000 a unit, plus some fill-up costs to stabilize those assets. So that's not uncommon for us to see. The other portfolios were not in the higher -- were not in New England or mid-Atlantic states, some were in California. They're a little bit different. They're in the $200,000 to $250,000 range to redevelop, reconstruct, so that's kind of typical.

Operator

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

Richard Anderson - BMO Capital Markets U.S.

Just a couple of questions. First on development, you're going to complete nearly $500 million in 2011. One of the issues with HCN maybe some of this pushed back a little bit now, may becoming an opportunity is your exposure to development. Do you see development? Because at this point, I think it's in single digits as a percentage of your total assets. Do you see ramping up development, new investments over the course of the next few years?

George Chapman

Rich, Chapman here. I already mentioned that, that 6% to 8% is probably at the high end but we do view development as a particular opportunity that will even lead to monetization of existing assets with the great health systems. And there's clearly a need for a more customer friendly facilities, outpatient and otherwise, in the medical facilities area. And then from time to time, given the demand supply components, if we can add a very good senior housing asset into an existing master lease with one of our top partners, we will do that. But you should be looking at that range, 6% to 8% going forward.

Richard Anderson - BMO Capital Markets U.S.

One of the things that's happening in the Health Care REIT space is there's a lot of transaction activity. My pipeline is bigger than your pipeline type of thing. I guess, I wonder now that you're saying that there's not a whole lot of or as much visibility into your pipeline on a go-forward basis, I mean is that kind of a wink that you're willing to kind of slow it down a little bit, allow some of these deals to marinate and maybe address the potential that you have become too big to grow type of phenomenon?

George Chapman

I think that we're gearing up. We have already geared up to manage our company, which is much larger and more complex than it used to be and appropriate for a Health Care REIT going forward. We are adding to our RIDEA team. We are very capable of running all of these new investments and adding value to our RIDEA and other partners. So, I don't think that is a constraint but we are only going to do projects that really makes sense to us. And I just can't predict, Rich, whether we're going to find a number like we had last year or we're going to actually not even have the same type of year that we did last year. It's just difficult to say. We didn't go into last year thinking what we we're going to do is $3 billion necessarily. But because of the pent up demand, I guess, for financing and the need of private equity firms that were approaching their front lines [ph] (0:43:33), we had just a wonderful opportunity to move forward and do more projects with our ongoing partners and to add several more and to move to a RIDEA structure. So we're just going to have to wait and see.

Richard Anderson - BMO Capital Markets U.S.

But you don't think that there's a too big type of number in your mind? You could grow and grow and grow as far as you're concerned?

George Chapman

I think we can. I suspect that at some point, when the three REITs that seem to be growing most quickly get to 20% or 25%, it's going to be more difficult to grow at 6% to 7%. It might be 4% to 5% but you have to look then at the risk-adjusted return to people. So I sort of view the perceptions as changing over time as some of the larger REITs get much larger. But we have a lot of very good transactions we can pursue and we're looking forward to it.

Richard Anderson - BMO Capital Markets U.S.

On the topic of RIDEA, can you comment on -- you and others taking on more risks and kind of transitioning from a conventional Health Care REIT and how investors should view the risk perspective of your company as you take on things like occupancy opportunities in Silverado and others. I guess the risk perspective is changing for you and I wanted to see how you think about that as a long-term issue for your company.

George Chapman

I think Scott made the point very precisely in his comments that we see a balance between triple net lease portfolio and the operating portfolios being very appropriate and that it is just one more way in which we can diversify and provide a better risk-adjusted return to our shareholders. In terms of the particular risk, we have done business with Merrill Gardens and Silverado for almost 15 years now. We've been their partner. We know what they do and we know how they do it and we think we're going to be right on top of those. And as you look at our good friends at Brandywine, Benchmark and Senior Star, who we have been involved with in the industry forever, we think we have best-in-class operators and think that the risks are minimal and very manageable and that our returns, which will be greater than the normal triple lease, more than make up for it.

Richard Anderson - BMO Capital Markets U.S.

One last question is on the entrance fee issue. You mentioned the 8.3% increase in rent for senior living communities. I guess that's about eight of the 13 that you have outstanding in entrance fees, is that correct?

Scott Estes

Rich, it's actually 11 of the 13, that’s all fees, the vast majority of that portfolio.

Richard Anderson - BMO Capital Markets U.S.

What amount is still left on the table in terms of recapturing some of the deferred rent that you gave away at the bottom of that market? Do you see significantly more to catch up on in future years or do you think you get back to where you kind of started with this increase during 2011?

George Chapman

I think we sort of look at it as catching up in two or three years and then perhaps going past and averaging out about the same that we would've otherwise. So much of it depends on when the economy or if the economy regains its previous form and the housing markets come back. But the way we're looking at is we're going to move. I think it's Scott, isn't eight out of this 11 that are moving ahead at the 5%?

Scott Estes

Nine.

George Chapman

Nine. Then we can move those ahead at 50 bps increasers for the next several years and I don't want people to model more than that until the economy really gets going. And then the entrance fee communities, will be the greatest beneficiaries of a faster growing economy.

Richard Anderson - BMO Capital Markets U.S.

So the recovery of the entrance fee issue is this is the first of a say two- to three-year process?

George Chapman

I think so.

Operator

Your next question comes from the line of Michael Mueller with J.P. Morgan.

Michael Mueller - JP Morgan Chase & Co

On the Senior Star acquisition, I think the going-in cap rate was a 6%, but you have some properties in fill up there? If you exclude those, can you talk about what the yield would've been on that portfolio?

Scott Estes

Do you want to walk him through that, the Senior Star portfolio?

Charles Herman

New acquisitions were around the 7% yield going in.

We had some properties in fill up. This is Chuck Herman. We have a couple of properties in fill up and then we bought a stable portfolio, with some room but generally stable at around a 7% yield.

George Chapman

And we do think that the Senior Star portfolio could have one of the highest growth rates in the NOI side. So we're very much looking forward to doing a lot of business with Bill and Bob Thomas going forward.

Michael Mueller - JP Morgan Chase & Co

And then on the projected growth of call it about 5% to 6% on the RIDEA assets over the next few years, can you clear that up? How much of it do you see coming from occupancy versus pricing. I know you mentioned the portfolio is on average were about 86% leased. So is it, would you say it's 2/3 occupancy pick up and the balance on pricing or is it even more skewed towards occupancy?

Scott Estes

This is Scott Estes, again. We will talk in terms of the aggregate portfolio and I do think you're right. That is in our opinion, a good representation of the opportunity on the occupancy front. The fact that the blended portfolio is about 86% occupancy. But I think as you can tell from the data that the Senior Star and the Silverado portfolio is due to having some assets in essence and fill up had some bigger opportunities there. So the short of it is there's some significant opportunities on occupancy. I'd say somewhat of an occupancy opportunity on both the Merrill Gardens and Benchmark over time. But I think those that are the more stable assets have the best pricing power would probably where you’d see that the margin expansion opportunity is due to their strong market positions and pricing power. So it's really a blend of both and I would actually, I think we're very comfortable with those projections based on the numbers that we're looking at right now.

Michael Mueller - JP Morgan Chase & Co

And last question. Keeping with you for a second, the $3.08 for 2010, $0.75 in Q4, when you look at the numbers and the timing differentials between the acquisitions and the drag, about how much per share do you think the drag was in Q4?

Scott Estes

By our calculation it was about, the capital will be raised at about $0.05 diluted in the fourth quarter. We raised about $450 million of 5.03% debt in early November and then 11.5 million shares of equity in early December. So aggregate, we calculated about $0.05. And really, honestly, on the timing, we're just talking about that, Steve, [ph] (0:50:54) as a means of an example, if the Brandywine, $600 million transaction happened on December 1 instead of December 31, that would have added about $0.03 for the quarter. So that would be my general view. This is about $0.05 from the capital activity and then really just a lot of the deals all just came at the end of the year, which set us up for a good 2011.

Operator

Your next question comes from the line of Rob Mains with Morgan Keegan.

Robert Mains - Morgan Keegan & Company, Inc.

Scott, I want to clarify a couple of things. First of all, earlier question about G&A, am I correct that the fourth quarter figure specifically does include that $1 million of stock compensation grants?

Scott Estes

That is included in the fourth quarter number, yes.

Robert Mains - Morgan Keegan & Company, Inc.

So a normalized number would be $1 million lower?

Scott Estes

That's correct. That was in the release Rob, in the first quarter, traditionally we have about $3.9 million of accelerated vesting of grants as it detailed in the press release. Remember to do that.

Robert Mains - Morgan Keegan & Company, Inc.

Right. And then I have a question before the year, senior housing NOI number gets swamped by the new deals. In the fourth quarter, we just had Merrill Gardens. And stop me if any of my numbers are wrong here, but in the third quarter, you had Merrill Gardens on a weighted average for less than a month because some of the properties closed later. And you did $4.8 million in NOI, and if I just multiply that by three, I would've gotten $14.4 million and your fourth quarter number was lower than that. Was there anything going on with that portfolio specifically in Q4?

Scott Estes

No, Rob. As I recall in the month of September in particular, I recall there was a $200,000 or $300,000 adjustment. That's a positive adjustment in that month. Again, I still think the best way to think about the Merrill Gardens portfolio is occupancy was stable. And again, we're getting an approximate 7% return currently and we'll continue to roll that out as a part of the portfolio in 2011.

Robert Mains - Morgan Keegan & Company, Inc.

So the full quarter that we saw in Q4 is probably a better run rate to use?

Scott Estes

Sure, if you're trying to model it by operator, sure.

Operator

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

Ross Nussbaum - UBS Investment Bank

It's Ross Nussbaum here for Dustin. On the operating side for the senior housing assets, what kind of geographic, non-compete clauses do you have built into the contracts? Can you continue to acquire assets in the markets where these operators are operating?

George Chapman

Typically, it's a 3-mile to 5-mile radius. We do a pretty good job though working with our operators to make sure we're not going to be competing with ourselves. We have a great ongoing relationship with these folks. We know exactly what the development plans are. Where they’re looking to acquire. So we feel pretty comfortable with that kind of number.

Ross Nussbaum - UBS Investment Bank

Specifically on the Brandywine portfolio, how do you define what fair market value is in terms of the rent reset?

Company Speaker

If the parties can agree, this is Scott Brinker speaking, it will be subject to an appraisal. I would just remind you that there's always a floor of the prior year plus the increaser. So there's only upside in the reset opportunity for us.

Ross Nussbaum - UBS Investment Bank

So would it be fair to say you look where the cash flows on that portfolio are in three years and hopefully have a meeting of the minds in terms of what an appropriate yield would be if you will from a rent perspective?

Company Speaker

That's right. The other point is our hope is that this converts into a partnership structured as RIDEA within three years or so.

Ross Nussbaum - UBS Investment Bank

And that was the second part of my question on Brandywine, which is a -- it looks like there's a skilled nursing component there. How does that fit in under the RIDEA structure? Is there a private letter ruling that's needed or do you think it's going to be okay?

Company Speaker

This is Scott again. Skilled nursing would be permitted under RIDEA and that's one sub-acute unit within an assisted living facility. And Brenda and her team actually have a history of operating skilled nursing in sub-acute units.

Operator

Your next question comes from the line of Tayo Okusanya with Jefferies & Company.

Omotayo Okusanya - Jefferies & Company, Inc.

A couple of quick questions. The Benchmark deal, just for modeling purposes, a date for closing. I think your press release said the first half of the year but the GPT press release said first quarter?

Scott Estes

I think that projection is I hope it’s roughly right around the borderline between the two quarters. It may be right at March 31 to April for your modeling purposes.

George Chapman

It's a function of licensure transfer and debt assumptions. That's what's driving those issues. We've come to all agreements. We're ready to move forward with the transaction.

Omotayo Okusanya - Jefferies & Company, Inc.

And then after you do all your charge transactions, you give us a number of 22% of your assets will be within the RIDEA structure. So we'll get a sense of what the percentage of NOI, that would be?

Scott Estes

Let me think about it, Tay, and get back to you. I don't want to give you a wrong number on the call here.

Omotayo Okusanya - Jefferies & Company, Inc.

Going back to an earlier question that was asked, the whole idea of the risk profile changing as you're increasingly exposed to the business cycles of senior housing, I'm just trying to get a sense of how you would tackle the world where fundamentals begin to turn negative. I think right now, you're getting into those house fundamentals are going to turn positive, but once the business cycle changes again, how do you deal with that?

Scott Estes

There tends to be only about 15% to 20% of the cash flow that's really going to be all that variable. That's what in effect we're trying to capture with these transactions. So these assets are going to yield because of the types of operators that we are working with, the quality of the assets, the location. There's going to be a yield from these assets. So it's not like they’re going to drop off the face and go negative on us.

Omotayo Okusanya - Jefferies & Company, Inc.

I asked because this company has such high operating leverage though, like in a tough environment, just a slight drop in vacancy really causes a big impact into overall margins. And I guess, how do you protect yourself against that. When the business cycle ultimately turns again, whether it's five years or 10 years from now?

Scott Estes

I could try to answer first then Scott Brinker could add to this. I would point to the track record of these best-in-class operators in the in fill markets and I believe Tom is very excited, the fact they've grown NOI 7% on average over the last what, four to five years. Obviously through one of the biggest downturns and we always speak of the resiliency of the senior housing industry even being not entirely resistant but somewhat resistant to economic downturns. So our view is yes. You may not get 5% plus every year but the down year shouldn't be that bad and on average, we should be able to get in excess of 5% returns over time.

Omotayo Okusanya - Jefferies & Company, Inc.

One more question, I appreciate you indulging me. The MOB platform, the 1% to 2% cash NOI gross projection for 2011 with flat occupancy. I'm just curious if you could break that out in regards to what you're expecting by way of revenue increases and also operating expense increases?

John Thomas

This is John Thomas, again we don't have a lot of roll this year, so most of that is coming from the built-in increasers and we're tightly managing the expenses and frankly lowering our costs, particularly on property taxes and energy costs. So it's a lower year and there's still is some rate pressure out in the market. So that's the tie together.

Omotayo Okusanya - Jefferies & Company, Inc.

So is it fair to say something like 1% revenue increases and expense is flat or. . .

John Thomas

Closer to 2% revenue and 1.5% on the expenses, so 1%.

Omotayo Okusanya - Jefferies & Company, Inc.

1% increase?

John Thomas

Yes.

Operator

Your next question comes from the line of Michael O'Dell with AIG Asset Management.

Unidentified Analyst

Just one question going back to the increased operating leverage with regards to the RIDEA structure, and just what type of leverage in terms of the debt to EBITDA basis you're targeting on a financial perspective?

Scott Estes

This is Scott. I would point out we were talking about the way the adjusted EBITDA page looks in our supplement. It's obviously skewed by the fact that we completed a very significant amount of these investments on the last, really, days of the quarter. So what you see on our supplemented net debt to EBITDA of 7.6x, basically using the annualized EBITDA from the investments we made in that last week, it would go down to about 6.7x to 6.8x. And our model this year shows roughly 6x to 6.5x is what we are basically what we're trying to get to in our internal model this year.

Unidentified Analyst

Just in terms of the decision to utilize the bridge facility, it seems like you have availability on the credit line. Just what's the thought process there?

Scott Estes

We do, and I think you're right. I think at the end of the day, the bridge is put in place to provide both flexibility from our perspective and just surety of financing. And we'll see in another month and a half or so if it's needed. But we haven't determined that. It's really was just done for flexibility from a capital management perspective. I think Mike -- again, the key is really we would manage the balance sheet to the 45%, I think or less over time debt to undepreciated both tax levels.

Unidentified Analyst

So you don't think taking more operating leverage would lead to an issue in terms of taking the same if not more financial leverage. Do you think you're fine and you're comfortable at that somewhat 45% level?

Scott Estes

Yes.

Unidentified Analyst

Just in terms of the one the rationale for the sellers in terms of monetizing their ownership interests. It seems like mostly founders out there for a while making that decision. Just some more color on the incentive management fees and whether that's profit driven or revenue driven?

Charles Herman

This is Chuck Herman again. The incentive management fees are a function of several different factors. Sometimes it's revenue related, clearly NOI related and occupancy. They're all different factors that we roll into the overall calculations. Each one's a little bit different depending upon the deal we could structure. So it changes based on the operator. But those are the basic levers that we can use.

Unidentified Analyst

So for these recent transactions, in terms of just a proportion of the deal either NOI driven or top line driven. Could you give me a sense or no?

George Chapman

It's mostly based on NOI.

Charles Herman

But to your comment on the rationale for the sellers on all these transactions, is that the question?

George Chapman

Some of the sellers were larger private equity folks that were looking to monetize. That was the case in a couple of instances, in most of the instances. The other was the management team looking to recoup some capital and then have a platform to grow additionally. So, those are the two main reasons.

Operator

Your next question comes from Michael Bilerman with Citi.

Unidentified Analyst

It's Quentin Valeli [ph] (1:03:58). Just going back to the GPT question that Tayo asked, in terms of the NOI yield that GPT started at, I think it was about 6.2%. Yours was 6.8%, 7.2%. I'm just wondering whether you could sort of walk us through what the difference there would be?

Scott Estes

This is Scott. I'll try to answer. I don't do their calculation, so I don't know for sure. But I think part of it is theirs is based on a trailing number and also the management fee is different. I believe they paid a 7% fee versus the 5% fee that we're paying Benchmark. That accounts for quite a bit of the differential, 50 basis points or so. And I think the rest is just standard NOI growth from 2010 to 2011, which is consistent with what they've done over the last four years during a pretty challenging economic climate.

Operator

[Operator Instructions] Your next question is a follow-up from Jerry Doctrow from Stifel Nicolaus.

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

Scott, I thought you said that Brandywine closed at the end of the fourth quarter and I thought that was a first quarter deal. So can you just clarify which of these closed fourth, which of these closed first and maybe give me a little more color on the additional transactions that closed in the [indiscernible] (1:05:27)?

Scott Estes

I'll probably point you to the Page 2 of our earnings release that has the four bullets that says the fourth quarter investments, Jerry. Walking through those, the Brandywine closed in December. You really can just reiterate it.

Operator

Your final question comes from the line of Tayo Okusanya from Jefferies and Company.

Omotayo Okusanya - Jefferies & Company, Inc.

Just a couple of quick follow ups. The disposition of $300 million for the year, I know Jana had asked about it earlier but could you give us a sense of what assets you're looking at?

Scott Estes

Sure. It's a blend of primarily senior housing and skilled nursing assets. Again, the number is approximately $300 million, as George pointed out, a good bit of that are some loans this year, about $150 million plus are actually loans. So that would be the rough overview. And it is skewed more likely to happen in our model in the first half of the year.

Omotayo Okusanya - Jefferies & Company, Inc.

Are you selling the loans or are the loans are just maturing?

Scott Estes

Couple of the loans are maturing, the maturity dates.

Omotayo Okusanya - Jefferies & Company, Inc.

And then just last question with you, George. It's more directed towards you but with you firing on so many cylinders right now, what’s kind of keeping you up at night or what do you worry about as you kind of think about the evolution of HCN over the next three to five years?

George Chapman

Tayo, what we've been building the last two or three years is a full-service platform and it's working, and it allows us to invest across the full spectrum of healthcare. And to do what's necessary to be a valued partner, i.e. in the medical office and the medical facilities area, being able to do property management, do planning for health systems, do development if necessary. In senior housing, we've added a lot of people because we have larger partnerships in the RIDEA structure or perhaps much more of a true partnership and the need to get on the ground and really be a help. So I think what would keep us up at night would be just that. Do we have the right infrastructure and the right people in place? We're continuously looking at it. As you look at our employee base, it is right now, we are 250 employees. I think we've done a pretty good job at being proactive. But as this very large investment opportunity continues, we're just going to have to keep working to enhance our capabilities. That's what I think my job is, is to make sure that we're in a position to handle all of these investments and to be a good partner in the RIDEA structure specifically, but also the health systems and our ongoing operators as well.

Operator

That concludes today's question-and-answer session for today. I'll hand the program back over to Mr. George Chapman for any other further comments or closing remarks.

George Chapman

I would just add that we appreciate your participation. Good questions. I think this relationship investment strategy is working. It's driven a very disciplined growth platform and we're looking forward to producing very strong FFO and FAD that should translate into a very good shareholder value in the future. So, thanks very much.

Operator

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

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