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Health Care REIT (NYSE:HCN)

Q1 2012 Earnings Call

May 08, 2012 10:00 am ET

Executives

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

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

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

John T. Thomas - Executive Vice President of Medical Facilities

Scott M. Brinker - Executive Vice President of Investments

Analysts

Jana Galan - BofA Merrill Lynch, Research Division

Bryan Sekino - Barclays Capital, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Philip J. Martin - Morningstar Inc., Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

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

Nicholas Yulico - Macquarie Research

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

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Operator

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

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

Jeffrey H. Miller

Thank you, Brooke. Good morning, everyone, and thank you for joining us today for Health Care REIT's First Quarter 2012 Conference Call. If you did not receive a copy of the news release distributed this morning, you may access it via the company's website at hcreit.com. We are holding a live webcast of today's call, which may be accessed through the company's website as well.

Certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that 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 release and from time to time in the company's filings with the SEC.

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

George L. Chapman

Thanks very much, Jeff. I'm pleased to report another strong quarter for our company and its shareholders. We had a record 24% and 26% normalized FFO and FAD per share growth, quarter over previous year quarter. Our relationship investment strategy is hitting on all cylinders, driving $750 million of investments for the first quarter and $1.3 billion year-to-date. Most importantly, this strategy has produced a consistent and predictable pipeline and enhanced the quality of our already strong portfolio. And of the $750 million of new Q1 investments, nearly 90% of them were with existing partners.

We have attracted the industry's finest operators and health systems largely as a result of our reputation as a value-add partner. This reputation has been earned over many years of being a key part of numerous providers' successes, yet we understand the need to earn that confidence every day. We're also quite pleased to welcome Senior Lifestyle as the 10th largest senior housing operator in the United States to our portfolio, and we're excited to have Bill Kaplan, John DeLuca and team added to our portfolio of best-in-class operators.

And on May 1 of this quarter, we closed a previously announced $937 million Chartwell transaction. As most of you know, Chartwell is Canada's largest senior housing operator with high-quality assets in metro areas. The investment will be immediately accretive in markets with excellent demographic trends. And we look forward to a successful partnership and future growth in Canada.

Our portfolio continues to perform well with blended same-store cash NOI growth of 4.2%. Our RIDEA partners had same-store NOI growth of 10.3%. We believe that there are ample opportunities for continuing improvement in seniors housing as the economy and the housing markets improve. We also continue to be impressed with how well our skilled nursing operators are coping with the previously announced Medicare cuts. The general ability of operators to execute on mitigation efforts has been quite impressive. We continue to believe that post-acute providers, particularly, will be a key part of the evolving healthcare delivery system.

Genesis has a strong team and a scalable infrastructure that will allow the company to grow and produce strong results, and we are working closely with George Hager and team to help grow the short-stay post-acute component of their portfolio, resulting in accelerated quality mix improvement.

In the MOB space, we have a sector-leading occupancy of 93% and excellent retention rates. With nearly 90% of our facilities affiliated with strong health systems, our MOB portfolio is well-positioned for strong performance.

In addition to adding high-quality investments, we continue to enhance portfolio quality through the disposition of non-core assets. We are increasing our anticipated dispositions by $100 million to $300 million and expect most of the dispositions to be older, primarily Medicaid-funded skilled nursing homes and older, smaller, unaffiliated MOBs. We believe our active approach to portfolio management has helped us to maintain a sector-leading portfolio in terms of quality and diversification. Our portfolio is positioned in high-end, high barrier-to-entry markets. 40% of the portfolio is located in the northeast and mid-Atlantic areas. 70% -- 76% of the entire portfolio and 90% of our RIDEA investments were located in East and West Coast markets or the top 31 MSAs.

Facilities in these markets have generally outperformed. But in addition, these concentrations have provided and will continue to provide opportunities to foster collaboration among portfolio partners across the healthcare spectrum. As the healthcare markets have changed dramatically during the last several years, Health Care REIT has benefited from extraordinary growth as our commitment to relationships, improvement of healthcare delivery and collaboration has appealed to operators and health systems. We expect the evolution of healthcare will continue given the need for professional management, technology and economies of scale. We believe this will drive continuing change and consolidation, resulting in larger, professionally-managed branded operators and health systems that should further strengthen our portfolio valuation.

We're very pleased with the ongoing volume of new investment opportunities, yet there are fewer larger portfolios still available. And at some point, the pure transactional volume will decrease. And at that point, our relationship strategy will constitute an even more important competitive advantage by providing consistent and predictable access to ongoing investment opportunities from our portfolio companies.

Scott Estes will primarily focus on capital markets activities and financial and balance sheet metrics, but let me simply make 2 points: One, we achieved our record FFO and FAD growth while maintaining conservative leverage with current liquidity of $2.2 billion; and two, through our capital markets activities, we extended our average debt maturity to 9.5 years, the longest average maturity among the big -- so-called Big 3, and this 9.5 average debt maturity closely mirrors our portfolio lease duration of approximately 10.4 years.

Before I turning to Scott for his comments, I'd like to take a moment and welcome Judy Pelham to our board. Judy has been actively involved in the healthcare industry for over 30 years, including leadership roles with leading hospital systems and healthcare institutions. Most recently, she served as President and Chief Executive Officer of Trinity Health, one of the top 10 healthcare systems in the United States. Ms. Pelham currently serves on the Boards of Directors of Amgen and Smith College, and we all believe that Judy will be a great addition to our board.

And with that, I'll ask Scott Estes, our CFO, to address financial and capital markets matters. Scott?

Scott A. Estes

Thanks, George, and good morning, everyone. As George discussed, our relationship investment program continued to generate a steady pipeline of opportunities, and our portfolio continued to perform well, highlighted by 4.2% blended same-store cash NOI growth, including over 10% growth in our seniors housing operating portfolio. We put ourselves in a great liquidity position, having raised over $2 billion of capital through early April, which lowered leverage and was used to pay down our primary credit line, retired $275 million of higher yielding preferred stock, redeemed $126 million of convertible debt, pay off $185 million of secured debt and financed our investments. Despite the number of moving parts as a result of our first quarter capital transactions, we were able to generate normalized FFO and FAD per share growth of 24% and 26%, respectively, our best in recent memory.

Turning to the details of the quarter. Regarding investment activity, we completed $753 million of growth investments during the first quarter, $654 million of which were acquisitions with the majority of the remainder in development funding. During the quarter, we expanded our partnership with Belmont Village, acquiring 6 seniors housing operating assets for $210 million. In addition, we acquired 13 medical facilities, which included 12 medical office buildings for $332 million that are on average 94% occupied, 83,000 square feet per building and all affiliated with leading health systems in their respective markets.

Finally, as George mentioned, we added another high-quality operator to our portfolio with the addition of Senior Lifestyle Corporation, acquiring 3 triple-net lease seniors housing properties for $96 million.

In terms of first quarter pricing, our triple-net seniors housing investments were generally priced at initial yields in the low- to mid-7% range. Our recent RIDEA transactions were priced in the upper 6% range, and medical office buildings were priced in the mid-6% range, reflecting these very high-quality additions to the portfolio.

Our first quarter dispositions consisted of 4 smaller non-strategic medical office buildings with a net book value of $32 million, generating a small $769,000 gain on sale. As always, additional detail regarding the timing and pricing of first quarter acquisitions and dispositions can be found in our supplement. We're off to a great start to the second quarter, having completed our $510 million investment in the Chartwell transaction last week. And our pipeline throughout the remainder of 2012 looks strong and remains heavily concentrated in private-pay seniors housing and medical office building opportunities.

Turning now to portfolio performance. Before I begin here, I would point out several additions to our supplement this quarter. We consolidated our old construction book into a development project summary on Page 12, which includes more detailed disclosures, such as pre-leasing and health system affiliations. And on Page 14, we added new information detailing the success and history of our relationship investment program.

Both our stable seniors housing and skilled nursing post-acute care portfolios performed in line with expectations in light of recent additions to these portfolios and changes in Medicare reimbursement in the skilled nursing sector. Our seniors housing triple-net lease payment coverage stands at a solid 1.35x before management fees and 1.16x after management fees, while occupancy increased 90 basis points from the prior quarter to 89.1% as of December 31.

The stability of our seniors housing triple-net portfolio was once again demonstrated through a first quarter increase in same-store cash NOI of 3.4%. Our skilled nursing portfolio payment coverage currently stands at 2.04x before management fees and 1.57x after management fees for the trailing 12 months ended December 31, 2011. Our overall skilled nursing occupancy remains flat at the current 88% level, while same-store cash NOI increased 2.7% in the first quarter versus the prior year.

Our coverage declined somewhat sequentially, primarily due to the lower Medicare rates implemented in October. Importantly, however, much of the successful cost mitigation efforts were not in place at Genesis or many of our other skilled nursing operators in the fourth quarter. I think what I can provide is what I consider to be the most important perspective in terms of what our current 2012 run rate coverage numbers, which would be inclusive of the full effects of the Medicare reimbursement changes, as well as the mitigation efforts which are in place as of today. Based on that criteria, we believe our current skilled nursing portfolio calendar 2012 run rate coverage levels are about 1.7x to 1.8x before management fees and 1.3x to 1.4x after management fees. Our Genesis makes up the largest portion of these numbers and after speaking with George Hager and Tom DiVittorio last week, I can report that Genesis operating performance year-to-date is slightly above budget and that cost mitigation efforts continue to go well. As a result, our overall expectation regarding Genesis corporate level fixed charge coverage remains unchanged at close to 1.4x per calendar 2012.

At this point, I'll provide an update on our seniors housing operating portfolio, which is comprised of our RIDEA partnerships. Our operating portfolio continues to perform well and is ahead of budget through the first quarter of the year. The blended 87.3% occupancy rate across our 5 operating portfolios for the first quarter was flat versus the prior quarter and up 3.1% versus last year. In addition, same-store operating portfolio cash NOI for the first quarter increased a strong 10.3% versus the comparable quarter last year, driven by an 80 basis point increase in occupancy and a 5.1% increase in revenue per occupied unit. Through a combination of strong revenue per occupied unit growth and solid expense controls, margins in our same-store portfolio expanded 110 basis points year-over-year.

Moving now to the medical facilities portfolio. The medical office building portfolio metrics were stable as expected during the quarter, with overall occupancy up 20 basis points year-over-year to 93.1%, while trailing 12-months retention was 82.5% including 88% for the first quarter. Same-store occupancy of 92.9% remains among the highest in the sector, while same-store cash NOI grew 0.2% for the quarter.

For 2012, we continue to expect overall MOB portfolio occupancy to improve slightly to the 94% range and expect the tenant retention rate of approximately 80%. In regards to our hospital portfolio, our cash flow payment coverage remains strong at 2.45x before and 2.1x after management fees. We again experienced solid 2.8% same-store cash NOI growth in our hospital portfolio during the first quarter versus last year. We believe the recently announced proposed rules regarding fiscal '13 Medicare rate increases for both the inpatient hospital and LTAC sectors were generally positive news, though I would note that we have only 3% of our portfolio investment balance in inpatient hospitals, 2% in LTACs with the remaining 1% in inpatient rehab facilities.

Our life science portfolio was fairly steady in the quarter. The portfolio does remain 100% occupied, generating same-store cash NOI growth of 1.9%. More importantly, we expect another significant acceleration in our life science NOI growth back to the 5% level during the second half of 2012, as we've recently renewed approximately 20% of the overall portfolio at renewal rates that averaged 60% above current rates, commencing in mid-2012.

Turning next to financial results and guidance. We reported normalized first quarter FFO per share of $0.87, an increase of 24% versus last year's quarter, and normalized FAD per share of $0.78, an increase of 26% versus the comparable quarter last year. Quarterly performance was driven by the strong internal growth generated by our existing portfolio combined with a nearly 70% increase in gross real estate assets invested accretively over the past 15 months. We recently declared the 164th consecutive quarterly cash dividend for the quarter ended March 31 of $0.74 per share, representing a 3.5% increase over the same period last year.

I would also note that our preferred dividend of $19.2 million paid in the first quarter were about $2 million higher than the previous quarter or about $0.01 per share. This was a result of having about a month of overlap when we had both our new $287.5 million, 6.5% preferred Series J, as well as the old $100 million 7.875% Series D and $175 million 7.625% Series F securities outstanding. The $275 million aggregate value of the Series D and F were redeemed at par at the beginning of the second quarter. So as a result, our preferred dividend payment should decline to about $16.6 million per quarter.

Our first quarter G&A expense totaled $27.8 million, which as previously disclosed, included approximately $5 million of accelerated expensing of stock-based compensation, which typically occurs in the first quarter. First quarter G&A also included $4.3 million of special stock-based payments for executives boarded for retention, performance and excess shareholder value creation over both the short and longer term. Excluding these factors, we currently forecast a G&A run rate of approximately $21 million to $22 million next quarter and note that our overall G&A is running under budget year-to-date.

In terms of capital activity, we were very busy raising over $2 billion in aggregate thus far in 2012. We raised $1.1 billion of equity in February at $53.50 per share, representing the highest offering price in our history. We issued $287.5 million of preferred stock late in February at a record low of 6.5% coupon, which was used to refinance the $275 million of outstanding preferreds with coupons over 100 basis points above the new issue. We also issued 429,000 shares under our dividend reinvestment program, which generated $23 million in proceeds. And finally, we issued $600 million of 7-year notes in late March priced to yield 4.2%, which settled in early April. As a result, at the end of the first quarter, our entire $2 billion line of credit was available, and we had $469 million of cash on the balance sheet.

I would point out that following the end of the quarter, our March 31 balance sheet was impacted by the following items. I'll go through the list here. First, we issued the $600 million of senior notes; secondly, repaid $275 million of preferred stock. We've redeemed $126 million of 4.75% convertible debt. We repaid $185 million of secured debt at an average rate of approximately 4.25%. And finally, we funded the approximate $263 million cash component of the Chartwell transaction on May 1. So after all the dust settles on these transactions, we will be left with our full $2 billion line of credit available plus an approximate $200 million in cash.

Our capital transactions significantly strengthened our balance sheet. At the end of March, our debt to undepreciated book capitalization stood at 41.2%, representing a 5% decline from the prior quarter. Our trailing 12-month interest and fixed charge coverage remained solid at 3.2x and 2.4x, respectively. Net debt to adjusted EBITDA as reported in our supplement has improved to 5.5x. Importantly, these metrics will not be significantly impacted by capital activity subsequent to quarter end, as we use much of the senior note proceeds to pay down debt as recently mentioned.

Finally, I'll provide an update regarding our 2012 guidance and assumptions. As a reminder, our investment guidance for 2012 only includes the impact of investments completed during the first quarter; our Canadian transaction with Chartwell, including debt assumed as a part of that transaction; and third, the ongoing funding of our existing development pipeline.

Our earnings guidance does include all the capital activity announced year-to-date, including the April senior note issue and the pay-off I just discussed, which occurred subsequent to quarter end. And the final change included in our guidance is the $100 million increase in our planned dispositions from $200 million to $300 million. And we've identified certain non-strategic Medicaid-focused skilled nursing facilities for sale. We remain proactive in managing our high-quality portfolio, as we accelerate the push to move our portfolio to over 80% private pay.

As a result of the $100 million increase in our disposition forecast, we've lowered our guidance by $0.03 per share, resulting in a new 2012 normalized FFO range of $3.50 to $3.60 per diluted share and a new normalized FAD range of $3.08 to $3.18 per diluted share. Importantly, with $2.2 billion of current cash and line of credit availability to the extent our relationship investment program continues to prove successful throughout the remainder of the year, we do have the potential to move toward the higher end of these ranges or beyond.

Operator, that does conclude my prepared remarks, and we would like to open the call for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jana Galan with Bank of America Merrill Lynch.

Jana Galan - BofA Merrill Lynch, Research Division

I have a question on the greater disposition guidance and do you already have a large portion under contract, or are you seeing increased demands or more favorable pricing for the SNFs and MOB assets?

George L. Chapman

I think the fair answer to that would be that we have more interest and ability on the parts of the operators to buy back, refinance, recap some assets and we have an interest in reducing our commitment to Medicaid-oriented SNFs and certainly, an overall desire to move toward private pay at 80% to 85%. So it's just really that their abilities and ours -- seem to be coming together with ours. So we see more opportunity to do it. But until it's over, it's not over. So we'll wait and see to some extent, but we have some term sheets in certain cases and some desire on others and we'll keep reporting back to you.

Jana Galan - BofA Merrill Lynch, Research Division

And I believe there's also a hospital up for sale, maybe if you could speak to that.

Scott A. Estes

Sure. Jana, it's Scott. There was just a small hospital facility in the held-for-sale bucket that also met similar criteria. You guys have the amount on that? We can mail you the amount. I don't have it right in front of me.

George L. Chapman

Probably it's just $1 million. So it's a small...

Scott A. Estes

Yes, it was very, very small and it was a sold subsequent to quarter end.

Jana Galan - BofA Merrill Lynch, Research Division

And then just quickly on the financing for potential future acquisitions, you brought down leverage quite a bit. I was wondering if we should still kind of think about them being funded as 40% debt, 60% equity going forward.

George L. Chapman

We think so. We think we've done a few things that are going to be very important to strengthen the company going forward. One is keeping the leverage at around 40% and two, moving toward a higher percentage of private pay.

Operator

Your next question comes from Adam Feinstein with Barclays.

Bryan Sekino - Barclays Capital, Research Division

This is Bryan Sekino on behalf of Adam. Just a question on the disposition's increase, would you classify that more motivated by potential acquisitions that you're seeing and needing just a little bit more firepower? Or is it kind of a change in your view of that -- those assets, given some of the reimbursement changes over the last few months?

George L. Chapman

I think the latter, Bryan. We have $2.2 billion worth of firepower and right now, the incredible ability to raise capital. So we don't need it for that, but we are still very much dedicated to the post-acute platform and to certain operators within the SNF portfolio. But strictly within the Medicaid-oriented SNFs, we think we can drive a higher company value by having more dedicated to the key components of the future healthcare delivery systems such as post-acute but, in particular, driving more value through private pay, whether it be MOBs or perhaps more importantly, through our private senior housing.

Bryan Sekino - Barclays Capital, Research Division

Okay. And then just an update on the deal environment, it looks like you've got an improved balance sheet. There's certainly some unknowns in reimbursement but I guess, it appears CMS is not likely to issue proposed rules or make significant changes for SNFs and other post-acute providers. So is that helping the deal environment and despite the uncertainty in the election? And maybe talk about your appetite to capitalize on that.

George L. Chapman

Well, we're not going to be out there buying a whole lot of skilled nursing. We're going to help George Hager and his team grow his post-acute platform. We think that's just critical. And for us, we've had an ongoing access to good deals because of our relationship investing platform. I think we've told The Street in the last 10 quarters, we have averaged new investments of $1 billion, okay? And 40% of those have come from our ongoing partners. So we're just seeing it because of our relationships. The senior housing is -- people are still coming to us. People are adding on to their existing portfolio, and we feel like we have an ongoing predictable deal flow.

Operator

Your next question comes from Karin Ford with KeyBanc Capital Markets.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Just wanted to ask about the same-store growth this quarter. It's running ahead at 4.2%. I guess, it's running ahead of your 3% guidance you'd indicated for the year. Did you change that in the updated guidance at all? Or -- and do you expect it to come back down to the 3% level? Or what are your expectations for the rest of the year?

Scott A. Estes

Karin, it's Scott. We didn't, I guess, provide an official update to that. I would say through the first quarter, clearly, the most significant outlier in the positive sense would be the operating portfolio. I think it's really based on timing. I still believe our projection for the full year for most all the components of the portfolio remain unchanged. So you may see a bit of a trend, where you may average more towards the 3% level. I think as we've said, medical office building forecast was 0% to 1%. Most of the triple-net portfolios were roughly 2.5% to 3%. And then I still think that, as I mentioned on my prepared remarks, life science should get back to the 5% area in the third and fourth quarters. And I think the RIDEA portfolio projection, it's a little bit above budget but we're still forecasting somewhere on average for the full year, I would call it 5% and maybe a little bit above 5% -- 5% to 6%.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

It's helpful. And just one other question on Genesis, I think you were due for a rent bump on April 1, can you just talk about -- did that happen and how much was it?

Scott A. Estes

We did. The CPI was in excess of the 1.75% threshold to give us the full 3.5% rent bump in April.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

And that's incorporated in that 2012 pro forma coverage number that you gave earlier.

Scott A. Estes

Yes. It has been and it always has been in the numbers we've given around Genesis on the aggregate portfolio.

Operator

Your next question comes from Philip Martin with Morningstar.

Philip J. Martin - Morningstar Inc., Research Division

A couple of questions. First of all on -- can you -- Scott, can you give us a quick update on maintenance CapEx, especially -- well obviously, with regard to the RIDEA portfolio? How we should be thinking about that going forward, given the growth of the portfolio?

Scott A. Estes

Sure, Philip. I guess our general forecast -- the 2 largest components of CapEx, are both in the medical office building portfolio as well as the RIDEA portfolio. As a quick aside, we would expect the medical office building CapEx to be a little higher than it was in the first quarter due to just some timing of some renewals and other projected capital expenditures. And the RIDEA portfolio continues to run -- forecast around, I would say, about $1,700 per unit per year is probably the number to think about. It tends to translate into something, hover about 75 basis points of -- per year. It's about the number we've used in terms of RIDEA CapEx.

Philip J. Martin - Morningstar Inc., Research Division

Okay, okay. And then just kind of a broader, kind of industry question, George, you spoke a bit about this and obviously, working with Genesis, et cetera but give us your thoughts on post-acute 5 years into the future. As part of the integrated health care delivery system, are you going to be seeing a bit more demand? Or could you see this portfolio growing into the ancillary healthcare business? I know you're going more toward private pay, certainly, but the front end of the healthcare system and even the post-acute ancillary outpatient services are something that the REITs aren't as heavily involved in yet. And I say yet with a big question mark, but I would just be interested in your thoughts.

George L. Chapman

Yes. We really believe that post-acute is going to be a critical part of the healthcare delivery system, and post-acute can be defined in a lot of ways. You can have IRFs or you can have LTACs or just post-acute like George runs. And if anything George Hager and others, who are oriented toward post-acute in the SNF -- general SNF category are moving toward more specialty units within existing SNFs or moving to standalone post-acute. And we are very supportive of that. In terms of just post-acute as well, or looking at different settings, even some of our larger medical office buildings have surgical centers and all types of services. It can even fit generally within the ambit of post-acute. So we actually just see healthcare as rolling out in an entirely different way with much more preventative care, much more post-acute care, sometimes within the hospital system itself or through affiliations with it. So we clearly think healthcare is changing and will continue to change in that direction. Exactly how it's done, exactly what role the hospital plays in terms of ownership or joint venturing it or just affiliation agreements, that's more difficult to tell, Philip.

Operator

Your next question comes from Tayo Okusanya with Jefferies.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Just wanted a sense of the acquisition pipeline that George mentioned earlier. I was trying to get a sense of pricing wise, where you think a lot of that stuff may fall out and generally, overall, a sense of pricing trends. I noticed that the cap rates for the acquisitions you did this quarter were somewhat better than fourth quarter, except in the medical office building category where there is a lot further cap rate compression.

George L. Chapman

First of all, there wasn't further cap rate compression in the MOBs. It was just a continuation of the acquisition of 2 of the higher-end portfolios in the country that began in the fourth quarter. So there's no additional compression. We thought the pricing for those particular portfolios was totally appropriate. We think that cap rates can come down into the 6s for some of the remaining really good MOB platforms, which generally are close to the 7, 7.5, as our generally senior housing assets, again, with the best packages coming down into the 6s on occasion.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And then on the medical office building side of the business, you did talk about -- in first quarter, it was a 20 basis point same-store NOI kind of good. Can you just talk a little bit about what renewal spreads look like within that portfolio?

John T. Thomas

Tayo, it's John. The renewals still continue to see some pressure on renewal rates, but our retention was higher than expected so -- which offsets them and also Scott mentioned, lowers our CapEx requirements. So the portfolio is being managed well The -- I'm really proud of our expense reduction, which continues to drive and offset those the pressure on renewal rates.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Okay. When you say there's renewal pressure, you're not talking -- are you talking about negative mark-to-market? Or is it just basically flat?

John T. Thomas

Yes. There's still slight negative mark-to-market. The leases they're renewing this year, off of the tenure highs of 10 years ago. So these are second generation off of 2002 rates, which are really the peak so...

George L. Chapman

John, maybe you want to let me make a general comment. I think some of the earlier platforms that we purchased years ago are smaller, and they're facing more resistance in certain markets. As we see the newer, larger portfolio roll through, you're going to see some nice pickups in terms of our renewal rates.

John T. Thomas

Yes. That's right, George.

Scott A. Estes

Tayo, if you do look at the renewal rate, it is on to that 20% in aggregate over the next 5 years, which is among the lowest. And we do often receive the question, how much of the legacy win growth's portfolio is comprised of -- or is in the aggregate MOB portfolio. And I think it's less than half. I think it's actually more like 30-ish percent. Right, guys? 30%. So it's a clearly much smaller part of the aggregate, given the larger buildings we've been buying over the last 3 or 5 years.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

That's helpful. And then just lastly, with the closing of the Chartwell transaction, kind of since you announced the deal anything that between the announcement the closing, any kind of new information with regards to things that you found out were better than you expected? The things that you found out were worse than you expected?

Scott A. Estes

That was me trying to first, Tayo. I would say the portfolio is performing in line with underwritten expectations really through the first few months of 2012. So I would generally say there's no change from our underwritten expectations at this point.

Operator

Your next question comes from Josh Patinkin [ph] with BMO Capital Markets.

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

It's Rich Anderson here with Josh [ph]. So did you mention the seller of the MOBs?

George L. Chapman

No.

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

Can you?

John T. Thomas

Yes, Cambridge. It is in the annual.

George L. Chapman

Oh, you mean the seller of the ones that we purchased from?

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

Yes.

George L. Chapman

Yes. It was Cambridge and Richmond Honan.

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

It was Richmond Honan, okay.

Scott A. Estes

Both of them at both quarters, right, John?

John T. Thomas

Yes.

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

Okay. So do you have more, obviously, more to go there then, right? Particularly, in Richmond Honan?

John T. Thomas

One more to go. Rich, this is John Thomas. We've got one more to go and expected to close here soon so...

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

Okay. Just a quick question on the normalizing of FFO. I'm curious why you think stock compensation should be a normalizing factor?

Scott A. Estes

Rich, it's Scott. I'll try to take that one. I think we feel pretty strongly -- the number you're probably referring to is our -- at least categorizing the $4.3 million special stock grant. That was all stock that was paid to across the 9 executive team. It really was a special grant that was made for the successful transformation of the company and the very strong relative performance our stock has had over both the 1-, 3- and 5-year periods. And that stock is actually granted after year end. It wasn't in our previous expectations. In our view, since it was granted for past performance, we chose to exclude it from our normalized number.

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

I hope you don't mind if I don't.

Scott A. Estes

Do as you like to do, Rich.

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

On the pro forma coverage, the 1.3x, the 1.4x after management fees, you mentioned that includes the mitigation efforts. To what degree is that an offsetting factor? I mean, how low would it be after the full CMS but not including the mitigation factor?

Scott A. Estes

I don't know if we've ever looked at that. We decided to look and basically try to give you a run rate from where we are at in the first quarter, based on what mitigation efforts are in place today. I think it's in varying levels of success on mitigation. I know most operators are very focused on it and really for us, like we've said with Genesis representing about -- I think about 2/3 of our current skilled nursing portfolio, they currently have -- I think it's about $71 million of kind of in-place annualized mitigation efforts. So it helps but I still think the coverage levels are more than adequate with or without the specific mitigation.

George L. Chapman

Let me add a few comments, Rich, and allow me to disagree with you, too, in the premise of your question. It seems to me sort of an interesting but totally theoretical question you're asking, because as we've lived through 20 to 30 years watching skilled nursing, sometimes win some with the regulators and sometimes lose some. The rate that the nursing home operators are used to operating in a regulated environment. And to think that they wouldn't mitigate through cost reductions or more efficient staffing when there is a revenue effect, is just to sort of ignore what people have been doing for all of those years. And I think they've all done it pretty well, maybe George Hager and Mike and the rest somewhat more efficiently. But everybody's done it. They were used to doing this. It was just a big, big cut in reimbursement and demanding perhaps more severe cuts to the cost.

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

Okay. And then last question just on guidance to Scott. You mentioned -- that and it says in the release, it's all -- almost all a function of the higher-level dispositions. But there are a lot of -- the deleveraging steps, the shares and all that, that netted to a 0 impact on your guidance.

Scott A. Estes

Yes. Maybe let me just walk through that, Rich, for everyone's benefit. I think it's important. I would say the best way to think about it is our guidance would not have changed but for the increase in dispositions. We did not have -- so what was not included in our previous guidance was first of all, the $600 million of senior notes, the 4.2%, which I guess, at their own accord, were about call it a $0.09 potential negative. But that was in aggregate offset by $0.09 of positive from the $146 million of additional investments we made post that $508 million investment announcement when we put a release out in mid-February. The $146 million of additional investments, the $185 million of secured debt payoffs and the $126 million of convertible debt payoffs basically net out the new debt issue. So again just adding $100 million to the disposition guidance, that 10% to 11% probably happened around mid-years but it's that $0.03.

Operator

Your next question comes from Nick Yulico with Macquarie Capital.

Nicholas Yulico - Macquarie Research

I want to see on the seniors housing development side, if you guys could maybe talk about whether you're thinking at all about increasing your investment there, maybe give a sense about how big that sort of pipeline could get based on your existing relationships today because it seems like that's sort of one of the best ways you guys can sort of add, let's say, NAV upside to the stock at this point.

Scott A. Estes

Nick, help us understand the question. Did you say seniors housing operating or senior housing triple-net or just in general that you think about or thinking about the portfolio?

Nicholas Yulico - Macquarie Research

Yes. I mean, just in general. Just in general, I mean, mostly it's been on the triple-net side, right? So -- but I mean, could that piece of business go higher on the triple-net side? I mean, that's considering doing more on the operating side, perhaps?

Scott A. Estes

Yes. I'm sorry I didn't understand you were asking about the development component of the portfolio. Actually, we see development as a great opportunity in general. If you really look, most of our development would be focused on private pay, seniors housing, rental model, rolling into a master lease with an existing operator, as well as medical office buildings that are largely pre-leased. We don't break around generally unless we're about 75% plus pre-leased. We actually include that stat now in the book, which I think, the projects we have under way are what is it? 96% there -- 96% pre-lease, the projects we have under way. So I actually think the development projects there are a nice supplement to our acquisition-based growth. And I would say we generally -- I think, we'd probably have the potential to do something in the magnitude, maybe $300 million to $400 million to $500 million of starts per year. But I think we want to keep it pretty focused on existing relationships, high-quality assets and definitely keep it more toward the 5% to 8% range of the total portfolio. John, I don't know maybe you or someone we could comment -- we had a great facility open and we didn't talk about it this quarter with the Virtua addition, how much -- the 300,000-square foot medical office building that I believe is 98% occupied at opening and about an 8.2% initial yield.

George L. Chapman

And attached to the hospital.

Nicholas Yulico - Macquarie Research

And on the senior housing RIDEA side, is there any way to get a sense for how much is sort of left as far as units or some sort of way to frame the size of the sort of possible future opportunity set with your existing partners at this point?

George L. Chapman

I don't know that there really is. We have been -- if you look back over a number of quarters, we've been running at $400 million to $500 million with existing RIDEA partners and other partners. And we've managed to add some RIDEA partners in the last 2 or 3 quarters, although it's -- perhaps the volume is reduced a bit. I think that I just go back to my comment during my opening remarks and that is, probably the volumes are going to decrease somewhat over the next year or 2. And that's where our ability to continue to execute on our relationship investing program gives us a large competitive advantage.

Nicholas Yulico - Macquarie Research

Okay, that's helpful. And then just -- sorry, just one last quick question on the dispositions, is it possible to get the debt balances for those properties?

Scott A. Estes

Which ones, Nick? The ones that...

Nicholas Yulico - Macquarie Research

Well, the $200 million to $300 million, is there debt associated with them? I'm just trying to figure out what the net cash proceeds might be from that?

Scott A. Estes

I think 0, right? It's 0 on that aggregate $300 million. It is not related. If it is, it is relatively a small amount.

Operator

[Operator Instructions] Your next question comes from Michael Mueller with JPMorgan.

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

Few questions, first of all, on the senior housing RIDEA portfolio, I think you mentioned the 5.1% revenue increase. Considering occupancy went up about 80 basis points, can you talk about what the other revenue driver factors were? Was it just in general opening increases in base rate? Is it residents using more services or something else?

Scott A. Estes

There's -- it's those 2 points. It's both finance services and then also just the normal annual increases.

George L. Chapman

And they're probably different for different operators as well. Some people have really pushed enhanced services and others have been doing -- making it up elsewhere. I don't know if we can pin that down further, probably difficult to do.

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

Okay. What do you think is ballpark has been the average base rate increase?

Scott M. Brinker

I mean it varies by market. This is Scott. But generally, it's 3% or 4%. Some of the better markets were able to do even better. But generally speaking, they're getting at least CPI and if not better, which is why we prefer newer buildings, high barrier markets. Over the years, we've seen those markets -- or those facilities outperform inflation.

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

Okay. Going back to the pipeline that you're seeing on the investment side, can you just roughly quantify what the visible pipeline is that could close in 2012 or could close this year, even though nothing's in guidance for it at this point?

Scott A. Estes

Mike, it's Scott. Tough call. Maybe I would point to I think our relationship success in the past, and we've been able to generate somewhere in that ranges of $300 million to $500 million of repeat business per quarter. That's about, in my opinion, where the potential is. As I mentioned, it's a lot of seniors housing assets as well some additional medical office building opportunities. But it's pretty consistent with the pace that we've kind of viewed or call it general relationship-based business opportunity.

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

Okay. And last question for me, shifting gears going to Genesis, can you talk a little bit about just the cost mitigation? I mean, where exactly are the costs coming out of the system? Is it labor? If so, where particular in labor? Is it someplace else?

Scott A. Estes

Sure. I talked again with George and Tom. I think they are doing a good job. I think the specific answer to your question, there is a run rate of about $71 million. I would say at least half of those are coming at the facility level. Cost administration, maintenance, sanitary, housekeeping items like that. And then there's probably another $20 million or so or at least a portion of them are also facility based but also maybe more general that had both the facility level as well as overhead like some of the therapist productivity efforts, 401 (k) match and incentive comp changes that they've done. So actually, it's a pretty good percentage of -- it's actually at the facility level.

Operator

Your next question comes from Daniel Bernstein with Stifel, Nicolaus.

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

I guess a couple of portfolio questions, it looks like the lease coverage dropped a little bit on the triple-net senior housing. Was that just from the additional acquisitions you did in the quarter?

Scott A. Estes

Dan, I think you're breaking up a little bit. I think you said the senior housing coverage. Yes, the whole trend there is really solely a function of -- due to some of the additions to the portfolio. They kind of come in over the last 3 or 4 quarters.

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's what we thought. And then also on the medical office buildings, it looked like occupancy dropped on the same-store portfolio a little bit quarter-over-quarter. Obviously, it's still very high occupancy. But if you could just talk a little bit about that drop there and do you expect to get that back with some new tenant leases?

George L. Chapman

I think you're breaking out but you're asking about the slight drop in occupancy quarter-over-quarter?

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Yes, on the same-store portfolio. I just picked up my phone instead of the headphone here.

John T. Thomas

Yes. Just a very slight occupancy, which will recover -- decline which we will recover this quarter or next. We had a one-tenant downsize slightly. But comfortable that the occupancy will increase, as Scott mentioned at the beginning of the call, by the end of the year, back to the 94% range.

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And maybe a little nuance question on the SNF portfolio, but it looks like the Medicare mix kind of dropped quarter-over-quarter. I mean, I understand that the coverage drop coming from the Medicare cuts. But just wanted to understand the change in the mix. Is that also a result of the drop in the reimbursement? Or is that something else going on within the portfolio in terms of mix?

Scott A. Estes

No. It's due to that, Dan. Our day has basically stayed about the same in terms of percentages. What we show on the supplement, as revenue and the Medicare decline is the result to the rate reduction in October.

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just also -- a kind of disclaims that the supplement here on the CCRC is that they're -- they look like they're continuing to trend up very slowly. That's your -- that would be your take as well. And you see any -- and then -- and the other question related, do you see any acquisition opportunities in that entrance fee CCRC space? And you haven't done any of those. But do you see opportunities there?

George L. Chapman

Generally, not. We've decided to orient much more toward the rental model. And there are conceivably some that are arguably undermanaged by non-profits. It could be purchased but it's not going to be Health Care REIT that does it.

Dan Bernstein - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Is that because of your view of that particular model? I mean, we've had some web calls on the higher entrant -- higher entrance age and higher turnover in CCRCs. Is that just a strategic decision, based on your thoughts on the viability of the model? Or is there something else factoring into this?

George L. Chapman

No. I don't think so. I think that the entry fee model has a lot of viability. We just think we can have more predictable earnings and present our senior housing platform define generally to include triple-net and operating in a much more constructive way.

Operator

At this time, there are no further questions. I will now turn the conference back to Mr. Chapman for his closing remarks.

George L. Chapman

We all thank you for participating. And again, if there are follow-up questions, Scott and team will be available. Thank you.

Operator

Thank you. This concludes the conference. You may now disconnect.

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