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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

Scott M. Brinker - Executive Vice President of Investments

Charles J. Herman - Chief Investment Officer and Executive Vice President

Analysts

Wilfredo Guilloty - Morgan Stanley, Research Division

James Milam - Sandler O'Neill + Partners, L.P., Research Division

Jeff Theiler - Green Street Advisors, Inc., Research Division

Nicholas Yulico - Macquarie Research

Philip J. Martin - Morningstar Inc., Research Division

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

Todd Stender - Wells Fargo Securities, LLC, Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Tayo Okusanya

Jana Galan - BofA Merrill Lynch, Research Division

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

Health Care REIT (HCN) Q2 2012 Earnings Call August 6, 2012 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2012 Health Care REIT Earnings Conference Call. My name is Brooke, and I'll be your 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, 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 Second 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 and CEO and President of Health Care REIT, for his opening remarks. George?

George L. Chapman

Thanks, Jeff. I'm pleased to report another strong quarter for our company and its shareholders. Our relationship investment strategy is hitting on all cylinders, driving $1.1 billion of investments for the second quarter and $1.9 billion year-to-date. And the pipeline remains quite strong. Of the $1.1 billion of new Q2 investments, over 50% of them were with existing partners. As we look over the last 3 quarters, we closed over $2 billion of relationship investments that comprised approximately 2/3 of the total. Importantly, the portfolio generated second quarter year-over-year same-store cash NOI growth of 4.2%. This was led by a strong 7.4% growth from our senior housing operating portfolio. And notably, every category posted at least a 3% NOI growth.

During the last 5 years, we have taken advantage of unprecedented opportunities to transform our portfolio into the most diversified, highest-quality, lowest-risk portfolio in the sector. And in the second quarter, our portfolio exceeded 1,000 properties for the first time. And we have attracted the industry's finest operators and health systems, largely as a result of our reputation as a value-added partner. Importantly, due to our relationship investment program, we have the most predictable, consistent investment pipeline in the sector.

We continue to work hard to add value to our operator partnerships. We hold regular meetings to exchange ideas regarding best practices, and we are exploring ways in which our operators can take advantage of joint purchasing programs. One tangible result has been the establishment of a property and casualty program that has produced an 18% average cost reduction with improved coverages.

Our private pay percentage is now 74% and is expected to reach 80% within 12 months. And with this private pay percentage and the strong contribution from our RIDEA assets, we continue to believe that our portfolio is undervalued relative to other property types, particularly multifamily. And this belief is supported by a number of factors, but including a continuing cap rate compression in our sector and the strong portfolio NOI growth. These properties were the combination of solid NOI growth and relatively low capital expenditure requirements that performed very well even during the toughest economic times.

On May 1 this quarter, we closed a previously announced $937 million Chartwell transaction. Chartwell is Canada's largest senior housing operator, with high-quality assets in Metropolitan areas. This investment will be immediately accretive in markets with excellent demographic trends, and we look forward to a successful partnership and future growth in Canada and other strong markets.

Let me discuss another important transaction from the second quarter, and that is our joint venture with Legend Senior Living. Legend and HCN entered into a $279 million joint venture. Of the 15 facilities in the program, 9 were contributed by Legend and 6 by HCN. The real estate will be owned -- is owned 88% by HCN and 12% by Legend. Operations are owned 80% by Legend and 20% by HCN. Legend has been engaged as the independent manager.

We expect to expand the joint venture over time through opportunistic acquisitions as well as development of additional facilities in Legend's footprint. This is particularly noteworthy for us as we have been doing business with Tim Buchanan since 1995, when we financed his original company, Sterling House. Sterling House is now part of Brookdale. Tim is one of the early pioneers in our sector and is currently on the Board of Directors of ALFA. We have supported Tim through a number of successful ventures since 1995, and we're gratified to be entering into this larger, more closely aligned relationship with Tim and his team, who have always performed at the highest level.

I'll now turn to some additional commentary on our portfolio performance. We continue to be impressed with how our skilled nursing operators are coping with the previously announced Medicare cuts. The ability of operators to execute on mitigation efforts has been very impressive to us, and we continue to believe that post-acute providers particularly will be a key part of the evolving healthcare delivery system. The recent Genesis announcement of its agreement to purchase Sun Healthcare will produce the largest post-acute platform in the United States. The combined company has complementary platforms, including rehab and hospice, that should drive growth and strong results. Approximately 75% of Sun Healthcare's portfolio will overlap with the Genesis infrastructure. And we believe the increased scale and attendant synergy shall allow Genesis to drive substantial value. And we continue to work closely with George Hager and his team to 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 93.6% and excellent retention rates. And with 90% of our facilities affiliated with strong health systems, our MOB portfolio is well positioned for excellent performance. In addition to adding high-quality investments, we continue to enhance our portfolio quality through the disposition of non-core assets. We believe our portfolio rationalization program has helped us maintain a sector-leading portfolio. We have had success this year in disposing of $124 million of non-core assets, with current guidance of $300 million for the year. But if opportunities present themselves, we would dispose of even more non-core assets. And while we experienced some dilution in disposing of certain Medicaid focus-skilled nursing facilities, we continue to believe that the improvement to our portfolio quality far outweighs any near-term costs.

The portfolio is positioned in the high-end, "high barrier to entry" markets. 38% of the portfolio is located in the Northeast, in Mid-Atlantic areas. 76% of the portfolio and 90% [ph] of our RIDEA investments are located in East and West Coast markets for the top 31 MSAs. And facilities in these markets have generally outperformed other facilities. In addition, these concentrations have provided and will continue to provide opportunities to foster collaboration among portfolio partners across the health care spectrum.

As the health care markets have changed dramatically during the last several years, Health Care REIT has benefited from extraordinary growth as our commitment to relationships, improvement of health care delivery and collaboration has appealed to operators and health systems. We expect the evolution of health care to continue given the need for professional management, better technology and economies of scale. Partnerships are being formed with other provider types. They will also be formed with service providers that assist the operator to deliver an ever-improving experience to the customer. This will drive continuing change and consolidation, resulting in larger, professionally managed, branded operators and health systems that should further strengthen our portfolio valuations.

And at this point, I'll ask Scott Estes, our CFO, to address the certain financial and capital markets matters. Scott?

Scott A. Estes

Thanks, George. Good morning, everybody. As George discussed, our relationship investment program continues to generate a steady pipeline of opportunities, and our portfolio continues to perform well. Second quarter portfolio performance is strong across the board, generating blended same-store cash NOI growth of 4.2% year-over-year, led by strong 7.4% growth out of our seniors housing operating portfolio and, as George mentioned, with every category posting at least 3% growth year-over-year. We continue to strengthen and diversify our portfolio and are in a strong liquidity position as we continue to execute our business plan entering the second half of 2012.

Now turning to the details of the quarter, this is another solid quarter on the investment front, completing gross investments of $1.1 billion for the quarter and $1.9 billion year-to-date. Over $600 million or over 50% of our second quarter investments came out of existing relationships. The majority of the remainder was our Canadian investment with Chartwell that closed on May 1 and is performing slightly ahead of underwritten expectations through May and June. Approximately $550 million of our $1.1 billion in second quarter investments were not included in our previous guidance and, as such, is the primary basis for the 1% increase in our normalized FFO and FAD per-share guidance today.

As George discussed, our relationship investment program is driving consistent portfolio growth, enabling us to purchase high-quality assets at attractive returns for our shareholders. Pricing in the second quarter for both seniors housing and MOB investments averaged in the low to mid-7% range. Looking forward, our near-term investment pipeline remains primarily concentrated in private pay seniors housing and medical office buildings. Current pricing on these opportunities are generally in the 6.5% to 7% range. So the highest quality assets with higher NOI growth potential located in the best markets would trade below this range.

Finally, in terms of second quarter dispositions, we sold $92 million of properties, which consisted primarily of a nonstrategic 12-facility skilled nursing portfolio and a 6-facility seniors housing portfolio, generating total gains of $32 million.

Turning now to portfolio performance. Before I begin, I would note the only significant change to the supplement this quarter was the addition of the Chartwell portfolio information as part of our seniors housing operating portfolio on Page 7 of the document. This page includes 2 months of the Chartwell performance as the investment closed on May 1. In our seniors housing triple-net lease portfolio, payment coverage stands at a solid 1.34x before management fees and 1.15x after management fees. Occupancy of 88.2% as of March 31 remains comparable to the NIC industry average and has since increased 20 basis points to approximately 88.4% as of May 31. And more importantly, the stability of our seniors housing triple-net portfolio was once again demonstrated through a second quarter increase in same-store cash NOI of 3.5%.

Our skilled nursing portfolio payment coverage currently stands at 1.94x before management fees and 1.49x after management fees for the trailing 12 months ended March 31. Our overall skilled nursing occupancy increased 40 basis points sequentially to 88.3%, while same-store cash NOI increased 3.3% in the second quarter versus the prior year. Our coverage declined as expected on a sequential basis, primarily due to another quarter of lower Medicare rates implemented in October of 2011, moving into the trailing 12-month data. However, as anticipated, the recently announced positive 1.8% net increase to fiscal 2013 Medicare skilled nursing rates should help to stabilize coverages beginning later this year.

Based on our current outlook for state budgets, we are also forecasting roughly flat Medicaid rate increases in fiscal '13 across our skilled nursing portfolio, which was also in line with our previous expectations. Essentially, not a lot of change this quarter regarding our perspective on the skilled nursing segment and our SNF portfolio assumptions. I can report that Genesis' operating performance year-to-date is in line with budget through the first 6 months of the year and that their cross-mitigation efforts continue to go well as they have about $72.5 million of $80 million potential annualized cost savings in place as of today. Our perspective on our overall skilled nursing portfolio coverage run rate for the calendar 2012 year also remains unchanged, about 1.7 to 1.8x before management fees and 1.3 to 1.4x after management fees.

At this point, to provide an update on our seniors housing operating portfolio, which is comprised of our RIDEA partnerships, our operating portfolio continues to perform well and remains ahead of budget through the second quarter of the year. The blended 87.9% occupancy rate across our 6 operating portfolios for the second quarter increased 60 basis points versus the prior quarter and is up 1.6% versus last year. In addition, same-store operating portfolio cash NOI for the second quarter increased a strong 7.4% versus the comparable quarter last year, driven by a 140-basis-point increase in same-store occupancy and a 3.7% increase in revenue per occupied unit. Through a combination of strong revenue growth and solid expense control, margins in our same-store portfolio expanded 50 basis points year-over-year.

Moving now to the medical facilities portfolio. Our medical office building portfolio metrics came in slightly better than expectations during the quarter, due largely to the strong leasing efforts by our property management team. The overall occupancy here increased 20 basis points year-over-year and 50 basis points sequentially to 93.6%, while retention was 83% for the quarter and 80.3% for the trailing 12 months. Same-store occupancy of 92.7% remains among the highest in the sector, while same-store cash NOI grew a solid 3.1% for the quarter. I would note that we have only 277,000 square feet or just 2.3% of the portfolio expiring over the remainder of this year, only 3.1 million square feet or 26% of the current portfolio expiring through the end of 2016. For 2012, our current expectation is that our overall MOB portfolio occupancy will improve slightly to the 94% range and have a tenant retention rate of approximately 80%.

In regards to our hospital portfolio, cash flow payment coverage remains strong at 2.44x before and 2.09x after management fees. We again experienced strong 4% same-store cash NOI growth in our hospital portfolio during the second quarter versus last year. Our life science portfolio also performed well in the quarter as the portfolio is 98% occupied and generated same-store cash NOI growth of 4.3%. We do expect to continue to reap the benefits during the second half of the year from lease renewals in the life science portfolio for approximately 20% of the overall portfolio, renewal rates that average 60% above current rates, which commence in July and August of this year.

Turning now to financial results and guidance, we reported normalized second quarter FFO per share of $0.89 and normalized FAD per share of $0.79, both essentially flat versus last year. Our year-over-year growth was impacted by both dispositions of higher-yielding, nonstrategic assets over the last 12 months and the decision to prefund much of our investment activity announced year-to-date as we continue to dramatically enhance the quality of our assets and derisk the portfolio. Importantly, our recent success on the new investment front enabled a $0.03 increase in guidance today, as we currently project solid 4% to 6% normalized FFO per-share growth and 4% to 7% normalized FAD per-share growth for the full year.

We recently declared the 165th consecutive quarterly cash dividend for the quarter ended June 30 of $0.74 per share, representing a 3.5% increase over the same period last year. In terms of capital activity, the second quarter was a fairly quiet one after raising over $2 billion in aggregate through the beginning of April. We did issue 565,000 shares under our Dividend Reinvestment Program during the second quarter, generating $31 million in proceeds, and we assumed $127 million of secured debt at an average rate slightly above 5%. Our line of credit borrowing stood at $393 million as of June 30 or $188 million net of the $205 million in cash we had on the balance sheet. Subsequent to quarter end, we received an additional $249 million through funding our Canadian dollar-denominated term loan, where we'll pay interest of approximately 2.6%, and are in the process of repaying $168 million of convertible debt. So further adjusting for these 2 items, our balance sheet net of cash stands at only $107 million entering the second half of 2012.

Our capital transactions year-to-date have allowed us to maintain solid credit metrics. At the end of June, our net debt to underappreciated book capitalization stood at 43.8%. Our trailing 12 months interest and fixed charge coverage remained solid at 3.2x and 2.5x, respectively, while net debt to adjusted EBITDA, as reported in our supplement, was 6.0x.

Finally, I'll provide an update regarding our 2012 guidance and assumptions. And as a reminder, our earnings guidance for 2012 only includes the impact of investments in capital transactions completed year-to-date, the ongoing funding of our existing development pipeline and the $300 million of previously announced dispositions of primarily nonstrategic Medicaid-focused skilled nursing facilities. As I previously mentioned, we've increased our normalized FFO and FAD per-share guidance by $0.03 per share, due to the incremental investments completed through June, resulting in a new 2012 normalized FFO range of $3.53 to $3.63 per diluted share and a new normalized FAD range of $3.11 to $3.21 per diluted share.

Operator, that, I believe, concludes our prepared remarks, and we'd like to open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jorel Guilloty with Morgan Stanley.

Wilfredo Guilloty - Morgan Stanley, Research Division

I was wondering, given that SNF coverage ratios are one quarter in arrears, would it be possible for you to give us an indication of where coverage ratios are for the SNF portfolio and where the fixed charge ratios for the Genesis portfolio as of, I guess, the end of the second quarter?

Scott A. Estes

Jorel, it's Scott here. I'd say to answer your first question -- really both questions. Not a lot of change in our coverage perspective. The overall portfolio current run rate is about 1.7 to 1.8x before management fees and 1.3 to 1.4x after management fees. And our Genesis portfolio fixed charge coverage or at the [ph] company is really in line with what we've been saying and also in line with the portfolio of 1.3 to 1.4x.

Wilfredo Guilloty - Morgan Stanley, Research Division

And it also seems that you, I guess, expect a significant acceleration in SNF acquisitions in the near term. Would that be a fair assessment?

George L. Chapman

I think we've been very consistent with our investments. We've made the point that over the last 10 quarters or so, we've averaged over $1 billion a quarter. And I don't think we expect that to continue forever, as a lot of large portfolios have come out, been taken out of the mix. But we have a very strong pipeline right now, and things are going quite well.

Wilfredo Guilloty - Morgan Stanley, Research Division

Okay. And my last question is, is there any change on your forecast for same-store NOI for any of the asset classes since the 1Q call?

Scott A. Estes

Really, no, Jorel. I think that would put us in probably the mid-3% to 4% range for the full year.

Operator

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

James Milam - Sandler O'Neill + Partners, L.P., Research Division

My first quick question, G&A was a little bit higher this quarter than I was expecting. I was just curious if that's a run rate going forward? And then also if there's anything we should be looking for regarding one of the executive resignations in the quarter.

Scott A. Estes

Yes, James. Actually, the second quarter G&A did include a little less than $2 million of severance costs. We actually probably could have considered backing that out for normalized purposes. We did not. It's included in the number this quarter. And I think a fair run rate going forward is probably $23 million to $24 million as a result.

James Milam - Sandler O'Neill + Partners, L.P., Research Division

Okay. Perfect. And then can you guys give us just a little bit more color on the MOB acquisitions, just in terms of where they are, who they're leased to, if they're multi-tenant or single-tenant leases? And then you gave some good color in terms of acquisition pricing, but these acquisitions were a little bit higher cap rate than your MOB acquisitions last quarter. So I guess I'm trying to kind of drive at the distinction there and then what your outlook is going forward.

Scott A. Estes

James, this is Scott. I'll comment on that. I think of the 7 medical office buildings acquisitions we've completed in the quarter, I know that 5 were multi-tenant buildings and 2 were single-tenant buildings. I think the vast majority of those came out of some existing relationships, so I think that's a factor. As you think about pricing, you got to go and just [ph] -- I would estimate pricing in medical office buildings now are probably right around 7%, most of the deals we're looking at with the larger pools or larger-square-foot buildings with more services outpatient would be potentially below that.

James Milam - Sandler O'Neill + Partners, L.P., Research Division

Okay. Great. That helps. And then just my last quick one. Can you guys just remind me what the average rate is in the Chartwell portfolio?

Scott A. Estes

Rate meaning projected NOI yield?

James Milam - Sandler O'Neill + Partners, L.P., Research Division

More of a -- like a per-unit rent.

Scott M. Brinker

The monthly rental rate?

James Milam - Sandler O'Neill + Partners, L.P., Research Division

Yes. Exactly. I'm just trying to kind of compare that to the rest of the portfolio, just to get a better -- an idea of how that stacks up. I know it's obviously a different geography, et cetera.

Scott M. Brinker

This is Scott Brinker. It's really 2 different portfolios in Québec, which is about 1/2 of the portfolio. The average rate is less than $2,000 a month, closer to $1,500, because they're closer to senior apartments with very little care. And the rest of the portfolio was primarily in Ontario. And the average monthly rent there is more like $3,000 a month.

Operator

Your next question comes from Jeff Theiler with Green Street Advisors.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Just in terms of your investment pipeline here. Now you've got your relationship strategy. Is this the pace that you're kind of comfortable with the remainder of the year? Do you see any reason why you could increase or decrease? Are some of your operators finding more opportunities than expected or less than opportunities? Just a little comment on that, if you would.

George L. Chapman

We'd love to be able to do $1 billion a quarter every quarter. But these are sort of lumpy kinds of quarters, where you'll sometimes get a $500 million package or not. Right now, there are some pretty attractive packages out there that we're looking at. So it could theoretically exceed the average. But we don't count on it until we close. But we're surprised by the continuing strength of the investment pipeline.

Jeff Theiler - Green Street Advisors, Inc., Research Division

And then just a quick detail question. What kind of coverages are you getting on your triple-net investments that you made this quarter?

Scott A. Estes

Yes. The biggest one is Legend Senior Living, and that's in the 1.2x range, Jeff. And the others are around 1.1 to 1.2.

Operator

Your next question comes from Nick Yulico with Macquarie.

Nicholas Yulico - Macquarie Research

From the first quarter call, I believe the same-store NOI guidance for the seniors housing operating portfolio was plus 5% to 6% for the year. So you've now been achieving above that year-to-date. So what is driving the ramp-down in growth for the second half of the year?

Scott A. Estes

Nic, it's Scott. I would actually say if at the margin anything since the previous quarter, our expectations for the operating portfolio full year NOI growth have probably ticked up about 1%. Everyone seems to be doing pretty well, generally running in line to a little bit ahead of budget. So it's really just the timing. If I had to roughly forecast the next couple of quarters, it's in the 5% to 6% range. So I don't think there's really anything specific. You're just looking at year-over-year comps and things of that nature as you look at the individual quarters.

Nicholas Yulico - Macquarie Research

Okay. And then for the guidance, the $300 million disposition guidance, that already includes all the year-to-date activity?

Scott A. Estes

Yes.

Nicholas Yulico - Macquarie Research

Okay. And so then, as we think about to the FFO guidance range for the year, is there anything else that's driving the bottom end of the range other than -- is the range mostly sensitive to whether or not you get incremental dispositions done for the rest of the year?

Scott A. Estes

Yes. It's essentially due to that and the timing of the dispositions and as well as you do add a little bit of variability, arguably, with an operating portfolio as well.

Nicholas Yulico - Macquarie Research

Okay. And then just lastly, you did end of the quarter, which seems like the actual quarter activity based on the amount of investments you did, mostly funded with debt and some disposition proceeds. I mean, how are you thinking about your leverage ratio right now as you're going into the back half of the year, assuming you do not do any more dispositions for the year?

Scott A. Estes

I think we've been pretty consistent with just detailing our longer-term targets for balance sheet metrics. And I'll just reiterate those, I would say target of closer to 40% net debt to undepreciated book, mid-3x interest coverage, high-2x fixed charge coverage and somewhere in the 5 to 6x "net debt to EBITDA" area.

Operator

Your next question comes from Philip Martin with Morningstar.

Philip J. Martin - Morningstar Inc., Research Division

I just wanted to get a little more insight into -- I mean, how have discussions changed, if at all, with your relationships, given the increased size and breadth of your portfolio? I mean, obviously, you have a front-row seat to all of the challenges that these tenants and health systems face, the operators, et cetera. And I know, George, you had mentioned in your opening remarks the opportunities for collaboration. Again, just want to -- given your front-row seat, just want to get a sense of how discussions have changed and the types of opportunities and challenges these tenants face and where you see the opportunities.

Unknown Executive

George is having -- it's a little choppy in our room here. He's essentially, I think, asking just why is the relationship strategy successful and kind of our prospects going forward.

George L. Chapman

Well, Philip, you've followed us for many, many years, and you've seen the closeness of our relationships over those years. And I think that the relationship strategy becomes even more important in a time of massive change in terms of how healthcare is delivered and also when there is consolidation going on within the sector. I think everybody is sort of realizing that information systems, technology are extremely expensive but necessary, especially when we have ACOs coming and the need to break down the silos. So I think that we really benefited from the fact that we are immersed in healthcare and tend to foster collaboration, which gives a lot of our operators and health systems some comfort that we can add value. So I'd add also, in a consolidation mode, we are getting perhaps more deals than we ever have for that very reason. And frankly, we expect some of our operators to, over time, become larger companies, either through major acquisitions or through M&A. And I think that, to some degree, we have a seat at the table to try to drive not only the correct consolidation, the right companies coming together, perhaps, but also in terms of putting together the infrastructure necessary for what will be a much more complex time in health care.

Philip J. Martin - Morningstar Inc., Research Division

And when you look at your existing portfolio, the tenants and the health systems, where are their needs the greatest in terms of infrastructure needs, obsolescence issues? I mean, where are you seeing their needs the greatest?

George L. Chapman

That's a very, very tough question. We have seen some top-notch health systems do very well in terms of improving their information systems and technology and, for that matter, infrastructure. But it is very, very uneven, even within the health systems. But when you come down to senior housing, these are companies that were somewhat smaller and have grown markedly. And have generally done a very good job with information systems, adding people, looking hard at themselves and performing, but there's still a long way to go. We need to introduce more really top-notch business people into this field to drive it to the performance levels that are necessary for us to really pound the table and say, hey, they're undervalued and so are we. And that includes all the health care REITs who invest in some of these companies. So I would say there is a need across the board for additional professional management in systems, but people are doing a pretty good job of getting there. We also thought about, actually, as one of our sort of undertakings for our senior housing RIDEA and key operators in senior housing whatever [ph] putting together alliances that would allow for some of these improvements to information systems and technology as we drive senior housing up in the estimation of The Street.

Philip J. Martin - Morningstar Inc., Research Division

Okay. That's helpful. As I look, I mean, there's a real transitional phase here for health care and certainly the health care REITs and trying to understand the different risk-reward profiles of these individual health care REIT portfolios is becoming certainly more and more important. And being able to shed some light on some of the differences in terms of the opportunities and the risk-reward profiles of your portfolio versus other health care REIT portfolios, I think, is only going to help all of us understand both the opportunities and challenges, et cetera.

Operator

Your next question comes from Michael Mueller with JPMorgan.

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

A couple of things. First of all, George, you're talking about you may accelerate some non-core asset sales if you had the opportunity. Just was wondering how big of a pool you considered to be non-core? So if you could slice of x percent of it, how big would that be?

George L. Chapman

Right now, as a percentage, it is not very large. I mean, we have been, over the last 3 or 4 years, been selling some non-core smaller MOBs and those that are not closely affiliated with the systems, so we have substantially reduced any of those. In the skilled nursing area, frankly, they're all doing quite well, as I indicated in my opening remarks. But we do believe that, over time, it is probably the right thing to do to reduce the percentage of Medicaid-focused facilities that tend to be 25 years old or even older than that. So there could be another $200 million to $300 million, I suppose, of skilled nursing beyond the $300 million. If we had an opportunity to actually dispose of those, we would look hard at that. But I don't want to say much more than that. It's a pretty low number, probably $400 million, $500 million, that we could still, over time, dispose of.

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

Okay. And secondly, talking about the SNFs, can you give a little more color on the transaction where you bought, I think it was about $90 million of -- yes, that may be the right number, $90 million of the SNFs with Genesis? I mean, can you talk about -- the pricing, I think, was close to a 9 cap. Is that where you see pricing today? Are the terms similar to the initial batch you did, and are these add-on facilities for Genesis?

George L. Chapman

These were buildings that were affiliated with Genesis that they had taken over operations about a year or so prior. These were all in the Maryland, D.C. area and continued to enhance their portfolio there. So generally these were right in their footprint and high-quality assets affiliated with health systems. They had been owned by health system down there historically. So these were real good add-ons to their portfolio.

Scott A. Estes

Yes. Mike, I'm just going to add to your question about the pricing. You're right. It was 8.9% approximate initial yield, and the underwritten coverages are in the roughly 1.4 to 1.5x range.

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

Okay. And that 8.9% or close to 9%, do you think that's a ballpark for what the market is today overall? Or was there something specific about this portfolio where this is -- that's the number for that portfolio?

Scott A. Estes

I think that was the number for that portfolio.

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

Okay. And last question. Scott, not much on the credit line right now, but where do you think the average balance is? Where is the right average balance if we're just thinking of any point in time for the credit line? I mean, is it in the middle of where you are today in the $2 billion max?

Scott A. Estes

We've always said the ideal, probably, utilization is somewhere in the -- on average, is roughly in the 30% to 35% area. And I think it's just we've been pretty consistent with that being a rough target utilization.

Operator

Your next question comes from Todd Stender with Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Can you just share some specifics on disposition timing in the second half? And have you closed on any so far in the third quarter?

Scott A. Estes

Todd, it's Scott. Probably, the majority of those would be -- in fairly short order, call it the middle of third quarter for you guys for modeling purposes on average. I don't think any may have closed -- have not closed yet. So they haven't closed yet, but you could assume modeling-wise that they could close very near to now.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And just switching gears. How do you feel about how your concentration looks with Genesis? Should they be presented with more acquisition opportunities like Sun, would you add to Genesis at this point? How does kind of your 16% concentration feel?

George L. Chapman

We're very, very pleased with how the team has performed over at Genesis. We're very, very supportive of the M&A with Sun Healthcare. There are some great opportunities, especially with the 75% overlap, in terms of their facilities, the chance to put hospice and rehab together. But our deal with George is that we will support him, continue to support him. And we're also going to be very proactively improving the quality mix so that on one hand, George can take some of our facilities, perhaps to HUD, to refinance them and own some of his properties and have a lower rate. We, on the other hand, will replace those assets that would probably be somewhat more Medicaid-oriented with a standalone post-acute facility so that we will be improving our portfolio faster than even George's portfolio as a whole. But maintaining somewhere around that $2.5 billion to $3 billion level of investment with George.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And just looking at the MOB space. Can you just share what the competition was like for these 7 MOBs you acquired in the quarter?

George L. Chapman

Well, the competition is very, very strong out there for any MOB. So a lot of the investments we make are relating to certain of our developer connections and also related to health systems that we have a relationship with or our developer partners have a relationship with. So you have to be out there every day, and it's sort of pricey. And MOBs continue to be a very much favored part of the health care investing situation.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And just lastly, Scott, did you give a current line of credit balance? I wasn't sure if the figure you gave was net of cash.

Scott A. Estes

It would be net of cash. The details in the prepared remarks got us to a run rate essentially going into the second half of the year of a little over $100 million.

Operator

Your next question comes from Jim Sullivan with Cowen & Company.

James W. Sullivan - Cowen and Company, LLC, Research Division

I just want to follow on a few questions that you've already received that had to do with cap rates on MOBs and then the cap rate on SNFs. And as we look at the acquisition activity over the last several quarters, what was striking this quarter is that the average cap rate on the invested capital, I think, worked out to be about 7.7%. Now I know the SNF cap rate was unusually high here, but cap rates for the other 3 asset classes were also higher on a consecutive quarter basis. And I wonder if you could just touch on the trend generally in terms of cap rates for the different asset classes. George, you mentioned that the competition for MOB assets remains pretty strong, a lot of parties are interested. But the cap rates here were 100 basis points higher than Q1, 50 basis points higher than the fourth quarter. Is there something about these assets? Or is there, in fact -- have you seen cap rates generally tick up across the asset classes in reaction to some other factor?

George L. Chapman

No. I don't think there's any clear indication that cap rates are moving up. Quite the contrary. In my opening remarks, Jim, I mentioned that, if anything, cap rates for the highest-end senior housing assets may be compressing, okay. And Scott mentioned for MOBs that may be 7% cap rate, but you're going to see some great MOBs that are lower than that. It can be 6.25% to 6.50%. And I don't think you should take anything away. The specifics about the assets, we generally continue to invest in very high-end properties, but sometimes you get a little luckier with your initial cap rates than others. And I think it was just -- you shouldn't read into it as any kind of trend at all.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. So we have for our modeling purposes, we use an overall average of 7% for acquisitions on a full year basis, and that's still a good number to go with.

George L. Chapman

Yes. I think so. I mean, with our focus on high-end MOBs and senior housing, it's a good number, still.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And second question for me, I'm just curious about this. On the senior housing and the operating assets, you've had 4 quarters of exceptional same-property NOI growth. And I just wonder if, as you think about that going forward, when should we expect that to moderate? And on a longer-term basis, presumably this is a number that would just not be sustainable. So should we be looking toward -- what kind of factor should we be looking toward to see that moderating? Would it be the occupancy rate in the portfolio or what?

Scott A. Estes

James, this is Scott Estes. I think maybe, answer your question a couple of ways, one perspective, I think, that's helpful for everybody is to look at the difference between -- we do get some benefit from some assets in the RIDEA portfolio that are in fill-up. And if you look at the 7.4% quarter-over-quarter growth here in the second quarter, if you just look at the stable component of that, it would've been up about 5.7%. So you're still seeing some benefit from some assets that are in fill-up. It's not a lot. We've been pretty consistent with our longer-term growth expectation of 4% to 5% for a lot of these assets. And I think, in part, it is due to some component of fill-up aiding that. But the reality is, I think, the portfolio really had only about 90% occupancy. Still has a reasonable way to go, and the fill-up assets still have a reasonable way to go. So I would hope it could actually continue for some time.

James W. Sullivan - Cowen and Company, LLC, Research Division

Of course, many of us are used to following the apartment sector as well. We're very familiar with those metrics and how they play out over the course of the cycle, and we've seen occupancy rates typically reach peak levels at the 95%, 96% level. Are you suggesting that, that is also a good metric for the operating senior housing portfolio? Is that what you aspire to?

Scott A. Estes

I didn't hear that. What the occupancy expectation is?

Charles J. Herman

Probably occupancy expectation should be in the low- to mid-90% upon stabilization. And what you're also seeing in the marketplace today is some enhanced acuity. So unlike the apartment sector, where there isn't as much ancillary income that can provide some additional services in senior housing, which also drives rate and gets you additional margin.

Scott A. Estes

Yes. That's what I was looking at, Jim. Sorry I missed the outset of the question, but as we do compare and we think about the aggregate opportunity there, I think Chuck is exactly right. You have at least 3 or 4 of the operators in our RIDEA portfolio have more of an AL/dementia mix. And you think about it, the average length of stay in a lot of these buildings are really only 1.5 to 2 years. And when we look at the components of our revenue per occupied unit growth, we really do get a benefit from the service and care revenue component. As services are added and acuity increases within a pretty short length of stay, where you may get a negative 3% rate increase, you're also adding a pretty significant component of healthcare services at a higher price. It's a pretty different dynamic that I think is a big factor why health care is both more consistent and can actually generate pretty high growth.

James W. Sullivan - Cowen and Company, LLC, Research Division

But actually, in terms of the operating margin, it still is significantly less than, of course, multifamily. I guess, because your fixed cost number is so much higher. But are you suggesting that the significant operating margin expansion, as you move toward that 95% theoretically full occupancy number?

Scott A. Estes

I think there is. I mean, I think, when you look at the number for the quarter, I think it's about 32.5%. And that is obviously a blend of IL/AL within our aggregate RIDEA portfolio. The guidance we've always said, the more IL-focused portfolio had margins in the, what, better companies, mid-40s?

Charles J. Herman

Mid-40s to high 40s. And assisted living typically ranges from 30% to 35% operating margins.

Operator

Your next question comes from Rob Mains with Stifel, Nicolaus.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Not a whole lot left here. A question on the Legend transaction. Do I understand that you have an exclusive agreement to do any kind of new development or acquisitions with Legend?

Scott M. Brinker

Well, we have future rights to partner with Tim to continue acquisitions and development in these key markets. He's got scale in the Midwest as well as in Florida, has been successful over the years, and we would expect to grow in both markets with him.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then the Genesis transaction, if I understand it right, those were properties that were previously -- were they managed by Genesis or owned by Genesis?

Scott M. Brinker

They were owned by an affiliate of Genesis.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So it's just changing the lease owners through the real estate ownership.

Scott M. Brinker

Correct.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then when I look at your development pipeline, it seems to be kind of winding down. Is that the right way to look at your view of the development pipeline at this point?

George L. Chapman

It is very low relative to some of our other percentages. We want to maintain it at low levels, like, say, 5% max, if we can. But I think it's a little lower than normal right now. I mean, we really have to look at developing some of the state-of-the-art MOBs, which are really almost medical facilities today, with outpatient surgeries and all kinds of testing, et cetera. And you also have to think about expanding the footprint of some of our high-end senior housing folks. So I think we'll always have a certain amount of development. I think the 5% number, as pretty much the usual cap, is still going to be applicable. But while senior housing's changing, and as you well know, Rob, the medical facilities area is changing even more, with a strong commitment to outpatient types of services and the need to put those services in a much more appealing environment than, say, a older, larger, urban hospital. So we're going to be in the game but always keeping some sort of reasonable cap on how much development we do.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then turning to one question, since you raised the topic of medical office buildings. You've had a nice increase in occupancy. So have some of your peers. And not to take anything away from the efforts of your sales team to lease on new space, but based on some of your prior comments, can we also surmise that there might be a demand component that's helping drive occupancy?

George L. Chapman

Well, I mean, it's clear that health systems right now are looking hard at putting up state-of-the-art MOBs, especially as they are employing more and more doctors because of some of the issues surrounding reimbursement and some of the issues the docs are facing, too, as separate from the hospitals. So I think there is, but it's -- on the other hand, I think there's so much uncertainty out there that it's been somewhat sporadic in terms of MOB development. So I think that things like the doc fix [ph], waiting for the Supreme Court, there's uncertainty in this space. So we do think there is a demand component, but there is still uncertainty that is weighing against a lot of development at this point.

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

But that uncertainty, then, would weigh in favor of occupancy at existing assets?

George L. Chapman

Yes. It helps quite a bit, I think.

Operator

Your next question comes from Tayo Okusanya with Jefferies.

Tayo Okusanya

My question has more to do along the lines of acquisitions, specifically the appetite you would have to do debt investments rather than buying assets outright and also appetite to do more internationally, whether within Canada or maybe doing something in the U.K.

George L. Chapman

Well, you know you're referring to an analogous kind of investment as Jay made over in the U.K. with Four Seasons. We think that's a good investment for him. We probably are a little more reluctant to do mezz or debt investments, but every opportunity that one of our colleagues gets we've probably already taken a look at it as well. And we would be open to it. We wouldn't be that enthusiastic about those kind of investments. In terms of the U.K., I mean, we were there 15 years ago, and a number of us around this table spent a lot of time there. We think we know the U.K. markets well. We have a lot of friends over there still who are doing very high-end private-pay senior housing. So would we be open to it if we had a good opportunity and had a platform that could be expanded so that it would be worth our while. Yes, we would look at that.

Operator

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

Jana Galan - BofA Merrill Lynch, Research Division

Scott, I was hoping if you could clarify the 3% guidance increase. Is that solely on acquisition activity or is there some benefit from the preferred and convertible redemptions or your RIDEA investments being ahead of budget?

Scott A. Estes

At the end of the day, the increase is really attributable to the increase in acquisitions beyond what we had in our previous guidance. G&A was a little bit higher as well, and we did assume a little bit of secured debt that was also not in our previous guidance. So the net effect would be an approximate $0.03 increase.

Jana Galan - BofA Merrill Lynch, Research Division

Great. And then looking at the 2013 lease maturities, there's about, I think, 5% of triple-net senior housing revenues expiring. I was just curious if renewal discussions have begun and if there's any interest in potentially converting those to operating leases.

Scott A. Estes

Yes. There's actually a unique situation in both our 2013 and '14 maturities. The '13 one is actually our Brandywine lease, and that was just the nature of that initial lease term, it's initially just a 3-year lease. And the 2014 is Chelsea. So we have every expectation to expand those at the time that they come up, if not before. So that was really just a function of the initial structure that was put in place.

George L. Chapman

And there is the expectation, especially with the Brandywine lease, that we may be in a position at some point to convert that to an -- operating lease into a RIDEA structure.

Operator

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

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

Just to follow up on Tayo's question. George, I think you said in your comments that you would like to grow your portfolio perhaps more in Canada. Can you just talk about how you'd potentially go about that? Would it be through the Chartwell venture? Are you looking at any additional portfolios, and how big could Canada get in your portfolio?

George L. Chapman

Well, of course, we're looking to expand our relationship with Chartwell. They're doing a very good job. It's a very good relationship. But we would look at other assets as well in Canada. What's difficult about Canada is that it's so much like the U.S. about 15 years ago. There are just very few large operators. So it's going to be very interesting to see how the Canadian market evolves. But I would imagine that there is going to be ongoing consolidation there as well. And we're just very active and looking out there, and we'll do things through Chartwell and look at other opportunities as well.

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

Are there any big portfolios on the market today up there?

George L. Chapman

We're not going to comment on what may be available. Everybody in Canada and the U.S. is looking at a very fast-moving marketplace, and we're going to be up there and we're going to be down here looking at any kind of opportunities that may come on the market.

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

Okay. And my second question is just on Genesis. Do you still expect the Sun acquisition to have a positive impact on Genesis corporate credit?

George L. Chapman

We do. George and Mike and his team are going to have to work with Bill Matthias' folks and really put their mark on the combined hole. So imagine that the first 6 to 12 months are going to be for George to approve up the merger. But we have every expectation with the combined platform, again, involving hospice, rehab and other types of activities as well as the [indiscernible] to be very, very favorable for George.

Operator

Your next question comes from Philip Martin with Morningstar.

Philip J. Martin - Morningstar Inc., Research Division

Last question. Regarding independent and assisted living. When you look at your, let's say your operating portfolio, can you talk about some of the trends you're seeing there in terms of traffic, demand, et cetera? Just the differences there in your portfolio.

Charles J. Herman

Could you repeat that? Was that a question about traffic and demand at the operating side?

Scott A. Estes

Independent living versus assisted living.

Philip J. Martin - Morningstar Inc., Research Division

Yes. I'm sorry, my phone is may be not too good here. But just wanting to get some idea of the traffic at assisted and independent living, the differences. Are you seeing a pickup in either? Again, assisted, more need-driven; independent, more want-driven. Are you seeing a little more pickup, I guess, on the independent living side? Or is that about the same? Or just looking at the trend.

Charles J. Herman

Yes. I think it's generally about the same as it has been, maybe a little bit of a pickup but nothing significant.

Operator

At this time, there are no further questions. Mr. Chapman, are there any other closing remarks?

George L. Chapman

No. We appreciate your participating in the call, and we will be available for follow-up questions all during today and tomorrow. Thank you.

Operator

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

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