Health Care REIT, Inc. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: Welltower Inc. (HCN)

Health Care REIT, Inc. (NYSE:HCN)

Q2 FY08 Earnings Call

August 6, 2008, 9:00 AM ET

Executives

Victoria J. Baker - VP, Financial Relations Board

George L. Chapman - Chairman and CEO

Raymond W. Braun - President

Scott A. Estes - Sr. VP and CFO

Frederick L. Farrar - EVP

Analysts

RichardC. Anderson - BMO Capital Markets

Karin Ford - KeyBanc Capital Markets

Jerry Doctrow - Stifel Nicolaus

Philip Martin - Cantor Fitzgerald

Omotayo Okusanya - UBS

Robert Mains - Morgan, Keegan & Company, Inc

Dustin Pizzo - Banc of America Securities

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Health Care REIT Incorporated Second Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Ms. Vicky Baker of the Financial Relations Board. Please go ahead.

Victoria J. Baker - Vice President, Financial Relations Board

Good morning and thank you for joining us today for Health Care REIT's second quarter 2008 conference call. In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the company's website at www.hcreit.com.

I would like to remind everyone that we are holding a live webcast of today's call, which may be accessed through the company's website as well. At this time, management would like me to inform you that 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 assurances 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.

Having said that, I would like to turn the call over now to George Chapman, Chairman and CEO of Health Care REIT for his opening remarks. Please go ahead, sir.

George L. Chapman - Chairman and Chief Executive Officer

Thank you, Vicky. We're very pleased with our second quarter results. Our investment program is highlighted by record gross investments of $488 million drove 12% quarterly FFO and FAD growth. Normalized FFO and FAD payout ratios are also quite good, 78% and 83% respectively for 2Q '08 and 80% and 85% for year-to-date 2008.

Net investments for the quarter equaled $355 million as we disposed of $133 million of assets, 88% of which were standalone senior housing and care assets. We recognized a gain of $118 million from such sales.

Although we are quite pleased with the magnitude and quality of our investment program, we are also pursuing a disciplined approach to managing our portfolio. We have a very diversified portfolio by property type, operator and location. Our top five operators comprise only 27% of the portfolio and our top 10 operators add up to only 41% of the portfolio. At the same time, payment coverages at the facility level are approximately 2:1.

We are on track to move our mix in senior housing and care towards combination projects as we firmly believe the combination of some or all of the long-term care service levels will have more appeal to the consumer over time and drive higher occupancies and revenues. At the same time, we continue to look to our freestanding ALFs and skilled nursing facilities as constituting a very strong part of our portfolio and revenue base. These assets generally have very strong portfolio coverages and the protection of master lease structures.

However, at right price, we intend to dispose of some of these assets that have maximized their value and, as you can see, we did so very effectively in the second quarter of 2008.

We've also made a strong commitment to the medical facility sector with medical office buildings and specialty care facilities constituting approximately 23% and 11.5% respectively of the committed portfolio. We are focusing our attention on facilities both on MOBs, medical office buildings and specialty care assets that are affiliated with strong systems or physician groups. Moreover, we are focusing on customer friendly, well designed facilities that will be viable for many years into the future.

We expect that our investment and disposition activity will continue to reflect our portfolio discipline and our goals. We believe that combination properties and medical facilities will constitute 80% or more of our investments in 2008 and that standalone skilled nursing, assisted living and interdependent living facilities will constitute 80% or more of our dispositions.

Our goal is to drive combination facilities and medical facilities to 75% or more of the portfolio. And in so doing, we expect to increase the private pay component of our revenue stream to 78% by year end.

I would remind you that we have always believed that a critical part of portfolio management relates to selling certain assets from the portfolio at the right prices and reallocating funds to assets that will be more attractive and viable going forward. We believe that this role is particularly important today as healthcare is featuring more in non-invasive and minimally invasive procedures that in turn drive changes to the real estate platform.

Moreover, new buildings need to be designed with maximum flexibility so that the layout can be changed to reflect delivery system changes that occur from time to time going forward. At the same time, consumers are demanding a different and more customer-centric real estate environment both in the medical facilities and senior housing and care spaces. Accordingly, we have been and will continue to be proactive in reorienting our portfolio so that we have the best quality real estate that caters to the changes driven by technological and pharmacological advances as well as customer preferences.

Execution of this strategy also provides additional funds and demonstrates our financial flexibility in these choppy capital markets.

Looked at most broadly, our investment program extends across the full spectrum of senior housing and acute care, features a relationship approach that can provide complete solutions of capital, development services and property management and includes development as a critical but measured part of the program.

Building new real estate is an integral part of Health Care REIT's investment strategy. We have the most diverse development program in our sector with projects including entrance fee, CCRCs, combination senior housing, medical office buildings, specialty care facilities including hospitals and expansions to existing properties. It is geographically diverse with projects in 18 states across the United States. And as noted in our supplement, our development program will produce attractive returns upon conversion at average initial cash yields of 9.1%. We believe development offers among the best risk adjusted returns in the market. And as we've discussed previously, it's the right thing to do as we look at today's changing healthcare and senior housing landscape.

Let me give you some additional details to illustrate both our diversity and the security behind our development program. Two-thirds of the program is currently invested in senior housing and care including combination, CCRCs, freestanding dementia and expansions to existing successful campuses.

Our interests are closely aligned with our operators through corporate and personal guarantees on 100% of these projects. 75% have a master lease structure, mitigating risk at the property level, 87% include a letter of credit, security account or escrow account. As you know, we have a successful 38-year track record underwriting and monitoring these projects and feel comfortable with our high quality operator partners. The remaining third of our development program relates to medical office buildings and specialty care facilities. While we have three medical office projects under construction including a health and wellness center anchored by an outpatient surgery center in New Jersey, sponsored by a strong health system, a medical arts facility in Kentucky that will include emergency and outpatient treatment, physician clinics and offices, anchored by another strong health system and a six-storey specialty medical building in Arizona will include medical office and life science space with a strong support from the local community.

We expect to invest in over 2 million square feet of MOBs over the next 12 months, substantially all of which are affiliated with strong health systems. These investments generally offer state-of-the-art technology and equipment, multiple services and treatment options and customer-friendly access in interiors. One example is a project that is comprised of 229,000 square feet of medical office building with a 68,000 square foot cancer center which are both connected to a strong hospital. These investments generally together with dispositions of non-core medical office buildings should further strengthen our medical office building portfolio.

We also have two specialty facilities currently underway: one a long-term acute care hospital in Alpac [ph] and an acute care hospital on the West Coast with a very strong rating. These state-of-the-art projects together with other similar future projects will deliver quality medical care to communities using all of the most current technology and innovation.

Within the next few months, we will be providing disclosure on all of the projects in our development program and we look forward to discussing these projects with you. We believe our development program differentiates us from the other companies in our sector because these innovative solutions to healthcare and senior housing real estate will continue to attract strong demand for the consumer over the long-term investment horizon.

We also take a relationship approach to investing in senior housing and care by entering into multi-year... multi-facility agreements with top quality operators. We essentially enlist these operators as part of our marketing team. Since the beginning of 2006, we've added 31 new relationships. In addition, we currently have 27 active lines of credit.

In the medical facilities arena, our full spectrum platform of capital, property management and development afford us a significant advantage in marketing. By providing solutions not simply capital, we believe we can develop and our developing closer relationships with health systems, developers and physician groups.

We have a large shadow pipeline in excess of $4 billion in the senior housing as well as medical facilities arena. And that enhances the probability of significant investment volume while at the same time eliminating the need to pursue large auction transactions to grow our portfolio. Instead, we view large transactions such as those as ones that will be pursued selectively with any success simply enhancing an already strong investment volume and quality.

In summary, we believe our investment program drives consistent quality investments and produces better returns than are generally produced through auction-based acquisitions.

And at this point, I will turn the program over to Ray Braun and Scott Estes who will comment on portfolio and financial matters. Ray?

Raymond W. Braun - President

Hey, good morning everyone. I am going to take us through our investments, talk a little bit about the market, give you an update on the portfolio and then review where the reimbursement legislation came out.

We had a great quarter of $488 million of gross investments, including $220 million of acquisitions at an initial yield of 8.6%. year-to-date, we've done $670 million of gross investments, $314 million of acquisitions and initial yield of 8.7%. We've also funded a $143 million in development, 30 properties and five expansion projects with a total commitments of $1.2 billion. There are $143 million of convergence during the quarter at average initial yields of 9.8%.

Dispositions had $133 million during the quarter with gains of $118 million. Most of these occurred at the end of the quarter, and Scott will update you on that.

In terms of the market, we continue to see our relationship investment strategy perform well. Cap rates generally are down 25 to 50 basis points. MOBs are around 7% to 8%, independent living 7.5% to 8%, assisted 8%, skilled nursing 12% to 13% and hospitals around 14% to 16%. Of course, quality assets in any category will trade at a premium, often times as much as 150 to 200 basis points.

Looking at the portfolio, 63% was in combination seniors housing, CCRCs, medical office and specialty care, which is up from 58% at the end of '07. Freestanding nursing homes have declined to 19% of our portfolio when you consider all the construction commitments outstanding. We currently have 481 properties in seniors housing and care with 56 operators in 37 states. Payment coverages remain strong.

We have stable payment of 14 for independent living and 16 for assisted living, 2.3 times [ph] for skilled nursing. On a same-store basis, coverages increased 21 basis points in the skilled portfolio, declined 3 basis points in AL and increased 9 basis points in the independent living.

Notably, the same-store independent living occupancy increased by 150 basis points year-over-year. Medical facilities, we have 126 MOBs with 5.3 million square feet and 28 specialty care facilities with 1885 beds. Payment coverages for those specialty facilities was strong at 2.5 times. We currently have five buildings that are $103 million in fill up.

Medical office NOI was $22 million in the second quarter and occupancy increased 20 basis points to 89%. We expect strong fourth quarter leasing and we anticipate ending the year at 92%.

While moving on to reimbursement, Medicaid, our average rates are going to go up about 1.7%, Florida may cut 1% Connecticut, Illinois and Oklahoma are expected to freeze rates. We do not anticipate any increase in payment risk as a result of these changes. Additionally, CMS provided a 3.4% market basket update on the skilled rates for Medicare and delayed recalibration of the RUG payment categories.

Finally, the President signed RIDEA which will allow healthcare REITs to lease properties to taxable REIT subsidiaries, operated by independent contractors, enabling REITs to capture the operating income in excess of the rent payment. It also allows TRSs to be 25% of the retail assets rather than 20%. We think this is positive legislation and we may adopt such a structure if the appropriate opportunity were present.

With that, I'll flip it over to you Scott.

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

Thanks Ray. Good morning everybody. We clearly enjoyed a record quarter on both the gross investment and earnings front. And second quarter normalized FFO per fully diluted share increased 12% to $0.87 from $0.78 last year. Normalized FAD per fully diluted share also increased 12% to $0.82 from $0.73 in the comparable quarter of 2007. Strong results were primarily driven by our success on the investment front, $143 million of conversions out of CIP to full yielding assets and annual increases across the portfolio.

Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income per share.

We recently declared the dividend for the quarter ended June 30th of $0.68 or $2.72 annually, representing a 3% increase above last year's rate. The payment represents the company's 149th consecutive quarterly dividend.

Gross revenues excluding discontinued operations totaled $136 million for the second quarter, up 21% versus the same quarter last year with 92% of gross revenues coming from rental income.

Our interest expense was essentially flat versus last year at $31.9 million despite higher borrowings under our line of credit, primarily due to lower line costs and an increase in capitalized interest as we build out our development pipeline.

Second quarter G&A came in at $10.6 million, in line with our expectations. We believe this run rate of approximately $10.5 million to $11 million is appropriate for the remaining quarters of 2008.

There were several other items of note during the quarter. As Ray mentioned, we had pay offs with an aggregate book value of $133 million. The most significant disposition was our sale of 19 assets to Emeritus which occurred right at the end of June and was the primary driver of our $118 million gain on asset sales. These were sold at a sub-6% cap rate based on in place rent and represent an excellent source of attractively priced capital. We also have $42 million of assets held for sale on our June 30th balance sheet which relate primarily to the second tranche of Emeritus assets that should be sold by the end of the year.

Our current guidance calls for an additional $170 million to $270 million of dispositions this year. If successful in these dispositions, we see the potential to realize additional gains on sale of roughly $50 million through the remainder of the year.

Moving on to the balance sheet, we ended the quarter with net real estate investments of $5.5 billion. We maintained a solid credit profile during the quarter with leverage at 49% on a debt to undepreciated book cap basis. But adjusted for our July equity offering, our debt to undepreciated book capitalization was 46%. Our trailing 12-month adjusted interest and fixed charge coverage were impacted by the large gain on asset sales during the second quarter. But excluding these gains, our interest in fixed charge coverage were a strong 3.0 times and 2.4 times respectively.

I would like to take a minute now to walk through our capital availability heading into the second half of the year. I think most importantly, we have nearly $800 million available and remain focused on maintaining adequate liquidity in light of the attractive investment opportunities we continue to find.

First, as on June 30th, we had $744 million drawn on our line of credit, leaving $406 million available. We also had cash and cash equivalents of $25 million and restricted cash of $150 million. We did break out restricted cash as a separate line item this quarter as our Emeritus asset sale was completed through a 1031 exchange with proceeds held in escrow accounts for future acquisitions.

Finally, we received net proceeds of $193 million from our successful equity offering during the first week of July. So as a result, we have nearly $800 million available for future acquisitions which does provide considerable flexibility and liquidity heading into the second half of the year.

Our debt maturity schedule is also in great shape. We currently have only $63 million in debt maturing through year-end 2010. And again, in terms of capital activities, I previously mentioned, we did complete a 4.6 million share offering in July for net proceeds of $193 million, which were used to pay down our line of credit. We saw strong demand in this transaction and note that the over allotment was fully exercised. Under our dividend reinvestment plan, we issued approximately 360,000 shares for $17 million in proceeds during the quarter.

I would like to point out here some enhancements to our supplemental information package that we did make this quarter. First, on page 20 of the supplement, we've added the breakdown by asset type of our investments in our top 10 states. We've also included brief descriptions of each of our top 10 operators on page 21. And as George mentioned these operators including... which includes three public companies, represented only 41% of portfolio investment balance at the end of June and is the most diversified among our larger cap [ph] healthcare REITs.

Finally, I think significant improvement enhancement is the addition of our same-store revenue growth for our seniors housing and care and specialty care assets on page 23 of the supplement. As you can see, our year-over-year same-store revenue growth for these categories was a combined 2.8% for the second quarter.

As George mentioned, we've also been working hard to enhance our disclosure regarding our development pipeline and can report that we expect to have that additional supplemental package with details on every one of our construction projects available prior to the NIC Conference in early September and will post that on our website as soon as it's available.

Finally, I would like to discuss our 2008 guidance. We are pleased with the continued success of our relationship investment strategy and note that our investment in disposition guidance remains unchanged. Based on the strength of our second quarter performance, we've increased our normalized FFO per share guidance to $3.33 to $3.39 from the previous range of $3.30 to $3.38, representing 7% to 9% year-over-year growth. We've also increased our normalized FAD per share guidance to $3.08 to $3.14 from the previous $3.04 to $3.12, which represents solid 5% to 8% growth over the previous year.

With that, I will turn the call back to you, George.

George L. Chapman - Chairman and Chief Executive Officer

Thank you, Scott, thank you, Ray. At this point, we'll open for questions.

Question And Answer

Operator

The question and answer session will be conducted electronically. [Operator Instructions]. We'll take our first question from Rich Anderson, BMO Capital Markets.

RichardC. Anderson - BMO Capital Markets

Hey, good morning everybody.

George L. Chapman - Chairman and Chief Executive Officer

Goodmorning.

Raymond W. Braun - President

Hey Rich.

RichardC. Anderson - BMO Capital Markets

Scott, you mentioned in guidance and Q2 strength tweaking up guidance for the full year. When you say 2Q strength, you mean the investment activities exceeded your expectations, is that what drove the guidance?

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

I think it's a little bit I think timing. It's a minor adjustment, but we obviously had a good quarter and continue to see the benefit of lower costs on our line. And I think it's really just an issue of timing. We obviously... I think we gave you all the details to put together your estimates. But I think I'd just leave it at that.

RichardC. Anderson - BMO Capital Markets

Okay. I think George, you said that 80% or more of your dispositions would be standalone facilities, is that correct?

George L. Chapman - Chairman and Chief Executive Officer

Yes, Rich, especially if we can get the kind of pricing that we've been seeing...

RichardC. Anderson - BMO Capital Markets

But that's throughout, ILF, assisted living, skilled nursing, anything sort of standalone.

George L. Chapman - Chairman and Chief Executive Officer

Right. Our general direction is to move toward more combination facilities, but we frankly still like our standalones. It's just that we are able to get some pretty good pricing at a time when it probably makes sense to enhance our cash with some dispositions.

RichardC. Anderson - BMO Capital Markets

Okay. So right now, standalone accounts for 32% of the portfolio. Would you be able to say what you think that number will be two, three years from now?

George L. Chapman - Chairman and Chief Executive Officer

20% to 25% probably.

RichardC. Anderson - BMO Capital Markets

20% to 25%. Okay. In terms of the investment process being accretive to you, can you talk about financing and what is different about the financing environment even for you guys and also your cost of equity that gets you to a point where you can make positive spread investing?

George L. Chapman - Chairman and Chief Executive Officer

The big issue that all of us face is the difficulty in raising unsecured money from unsecured debt issuances. What we did a year or so ago with a 10 year we issued it at a 6% yield and today it would be over 8%. That's sort of tough to deal with. Could be that overall that as cap rates change, we are all going to have to get used to a higher interest rate environment. No one is quite sure about that. I'll let you speculate on that Rich.

And in terms how we look at our equity... or cost of equity, I suppose that over time we've been pretty conservative. We for years have thought of our cost of equity when we are compiling our overall cost of capital as 12%. And then now we've come down to 10% and where are we now Scott?

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

I would say 9% to --

George L. Chapman - Chairman and Chief Executive Officer

9% to 10%. And could it be given what is happening in the capital markets that we could begin to look at it in a different way. We're constantly looking at that quarter-to-quarter, but we also trying not to lose our long-term perspective in terms of what investors want in terms of return on an equity investment. So it's sort of a to some degree a moving target, Rich, but we've been fairly conservative.

RichardC. Anderson - BMO Capital Markets

Okay. And when you're... when you think about how you are financing acquisitions, is it in your mind 50:50 or is it 70:30 equity... debt equity? How are you getting to your numbers?

George L. Chapman - Chairman and Chief Executive Officer

We look at our general mix between equity and debt and preferred. And Scott, you want to elaborate --

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

You are right, I think the concept is we manage the balance sheet to maintain our investment grade ratings. And I would say conceptually that usually, as we have stated I think in the past, our target debt to undepreciated book cap levels are about 45% to 50%, will fluctuate over time. And we'll be opportunistic as we always are in continuing to raise capital. So that's probably the appropriate target.

RichardC. Anderson - BMO Capital Markets

Okay. Last question, I just... I missed this number... you said you would invest how much in MOBs in the next 12 months?

George L. Chapman - Chairman and Chief Executive Officer

We've already begun the process of investing in MOBs in the second quarter and many of them are development because they are very new and very customer focused. But I said that including some that have started in the second quarter, we'll do hopefully $2 billion or more.

RichardC. Anderson - BMO Capital Markets

$2 billion. Okay, thank you.

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

Medical office... George, I probably should refer you [ph]. You are probably alluding to specialty care as well combining. I don't know if, Rich, your question with specifically medical office building, combining specialty care with medical office building to be the numbers George referenced.

Operator

We will go next to Karin Ford with KeyBanc Capital Markets.

Karin Ford - KeyBanc Capital Markets

Hi, good morning. Ray, did I hear you right that you said that cap rates are down 25 to 50 basis points?

Raymond W. Braun - President

Did I say down? I meant up.

Karin Ford - KeyBanc Capital Markets

Okay, that's what I thought. Okay. Can you just talk about... I know you mentioned Scott at the very end there you talked about the new legislation and you said you guys will sort of look at that potentially. And what type of format would you guys consider changing your strategy using the new legislation parameters?

Raymond W. Braun - President

Wellwe all think and all of us our [indiscernible] soon having how to reach... this of this as an opportunity and we're going to use very carefully. We think the market may change a bit for operators in terms of how they sell our properties and what ongoing returns they might take. So we have to be ready to be able to use it effectively. On the other hand, at the moment, many of our operators that we have relationships with view us as our capital source and could view a very aggressive move into these RIDEA type platforms as almost competitive with them. So I think we're going to do it carefully and consider what our ongoing relationships with operators are. But I think we'll clearly use it. We view as an opportunity to get a larger part of the revenue slice... larger slice of the revenue coming off the properties.

Karin Ford - KeyBanc Capital Markets

Would you look to restructure current triple net leases or only on new deals.

Raymond W. Braun - President

No, I think that one has to look at RIDEA as an opportunity to do whatever can be mutually beneficial for ourselves and operators. And so I don't... I certainly wouldn't rule out restructuring. I suspect that it's more likely be done in... for new transactions. But again, if the marketplace changes as between investors and operators, perhaps it will gain momentum. I don't think anybody can predict that right now, Karin.

Karin Ford - KeyBanc Capital Markets

Okay.Just one more question, turning to be MOB portfolio. Can you just talk about your new leasing prospects for the second half of the year and how you expect to get from 89% occupancy to 92% by the end?

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

Sure. Is Fred on? I'm happy to do it.

Frederick L. Farrar - Executive Vice President

Yes, I'm here.

George L. Chapman - Chairman and Chief Executive Officer

Go ahead Fred. Why don't you start?

Frederick L. Farrar - Executive Vice President

Yes, Karin, we had hired four we expanded our leasing staff from three to four in earlier quarters and we have also changed broker relationships where we weren't getting results in properties. And we're starting to see some very positive leasing trends. So when you look at a lower rate of lease expirations in the second half of the year versus the first half of the year and new leasing activity picking up, that's how we expect to improve it and move the occupancy up.

Karin Ford - KeyBanc Capital Markets

It looked like retention rates had declined a little bit. Do you expect that to rebound as well?

Frederick L. Farrar - Executive Vice President

Well, that's really a function of what's happening in each individual property, and so we do expect that to rebound.

Karin Ford - KeyBanc Capital Markets

Okay, thank you.

Operator

We'll go next to Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Thanks. And George, I think you need to move a little closer to the mike; having some trouble hearing you. But my question really was back to senior housing. We've now seen a little bit of results from some of the operators. We had some other REITs talking about this yesterday. And some of the comments that were made seemed to indicate that occupancy was firming, and at least in July sort of more upbeat about prospects for the rest of the year. I mean you guys have been active in this probably longer than anybody. I was just curious as kind of your overall take on the market kind of beyond the stats that you have put out, but just where you are sense is things are today and where you see them headed.

Raymond W. Braun - President

It's Ray, Jerry. When you look at the statistics coming out of NIC, you look at our portfolio, you look at other industry statistics, we still continue to perform at very good levels as an industry. And you may see a little slip between time to time in some occupancy or our margins. But generally, the industry remains very strong. We just reviewed all the industry trends in connection with our bank group meeting and it was good to see that performance was still very strong

Jerry Doctrow - Stifel Nicolaus

Okay. And you... we saw that performance you're thinking occupancy rates or some combination or just if you can give me a little more color.

Raymond W. Braun - President

Occupancy rates and margins

Jerry Doctrow - Stifel Nicolaus

Okay. And particularly on maybe if we can drill down on CCRCs, which I think folks are most nervous about given housing market and you've got a couple coming out of the ground, I think at least entrance fee and then rental as well and you've got some others in your portfolio. How about that slice, particularly how you're feeling about it, how you're feeling about the development and the stuff you've got stabilized?

George L. Chapman - Chairman and Chief Executive Officer

Jerry, it's still a little early on the ones that are just coming out of the ground but I'll say anecdotally either one of that opened couple of months ago was behind on some of their pre sales and it has gained momentum since opening. So perhaps that one being in the mid west people really wanted to see it open and ready to go but as we look at our say 14 communities right now and that can change quickly. Eight are meeting expectations, three are ahead. One was just acquired, which was a terrific piece of real estate down in Sea Island and two are currently somewhat behind budget.

So right now, I think we're pretty happy with what we are seeing, but we will keep you posted as we get more data. It's just to early. I mean one operator has seven of them open and three in development and he is covering and continues to add to existing... his existing assets. And we think he is one of the strongest operators out there and so far, that's a... those are CCRCs in the Southeast and we are very, very pleased with the quality of real estate and the progress that that company has made.

Some of the others have just started and one company in Midwest that has just opened one has another one under construction. We are just going to have to keep you posted on those. But so far so good.

Jerry Doctrow - Stifel Nicolaus

Okay.And then just a little bit on yields, again I think Ray had talked a little bit about cap rates currently I mean I was actually a little bit surprised to see the yields on the new stuff as high it was I think it was 6.8% on the acquisitions. Are you yes then that's even a little bit above the range I think that Ray has suggested. I mean where are you seeing so I just did ask and may be trend on that side of it as well

Unidentified Company Representative

I think that one has to break down the actual acquisitions in a quarter or in a partial year depending upon the asset type. In a quarter where we're going to do more AL and IL, you are going to have probably lower overall yields. But in the second quarter, for example, we had a number of LTACs and similarly in the first half. So that can skew the numbers. If we had done... right now, I guess we could read these out... the CCRC, the second quarter of '08 Jerry just to give you some color in it.

Jerry Doctrow - Stifel Nicolaus

Yes.

Unidentified Company Representative

We did 56 million of CCRC entrance fees at 8%. We did some combination rental $34 million at 7.5%, freestanding dementia 9%, specialty care hospitals 9.3%. MOBs at 8.8%. So that just gives you an example. It really depends on the weighting to a certain extent of the asset types.

Jerry Doctrow - Stifel Nicolaus

Right. But some of those even like the MOBs, others seem to be buying at 7%, 7.5%. Is that because your different markets are... you can call them deep properties or... it just seemed a little higher --

Unidentified Company Representative

Yes, one of those I know was a standalone facility out in Tucson that we got at a better yield, higher cap rate just because it was a standalone.

Jerry Doctrow - Stifel Nicolaus

Okay.

Unidentified Company Representative

It fit into our market, but we weren't going to pay up for it.

Jerry Doctrow - Stifel Nicolaus

Okay. Alright, thanks.

Unidentified Company Representative

Yes.

Operator

We'll go next is Philip Martin with Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Good morning.

George L. Chapman - Chairman and Chief Executive Officer

Hey Philip.

Raymond W. Braun - President

Hey Philip.

Philip Martin - Cantor Fitzgerald

George, a couple of questions on the combination projects. In terms of revenue per bed, revenue per resident, what type of a premium are you getting from the residents on these combination projects over a standalone independent assisted et cetera? Are you able to qualify that yet?

George L. Chapman - Chairman and Chief Executive Officer

Ray, do you have some thoughts on that?

Raymond W. Braun - President

Generally, it's hard to compare it in our portfolio because what do you compare it against? But generally, when you look at it from an industry perspective, you can get 10%, 15% premiums.

Philip Martin - Cantor Fitzgerald

Is the discussion... I mean a lot of the issues and concerns dealing with residents and their family is getting them into a property, and that can be pretty stressful, emotional period. Is the process, is the negotiation... not negotiation, is the process, the conversation with the family and the resident an easier one at a combination property than a standalone?

George L. Chapman - Chairman and Chief Executive Officer

You are right on point, Philip. I mean getting them to move is the hardest thing and then if you are in a freestanding setting, say, independent living, then there is a question about what if their acuity increases, are they going to have to move again. In the combination facilities, you lose that. The other dynamic that occurs is people become... come in a little earlier and it's their home and then they know they are going to stay there the rest of their life. And if you take good care of them and they are happy, they become less price sensitive on the annual rate increase.

Philip Martin - Cantor Fitzgerald

Exactly. So all the way around this is okay. Also, on the combination, how much of your plans and your development going forward will be developing these or creating these for lack of a better term clusters there are a few on a...there are more standalone than combination. They are more difficult to develop, more costly, more operating intensive. So how much of your program going forward will just be creating new and developing new and dealing with systems and getting them on board and doing that sort of in terms the growth.

George L. Chapman - Chairman and Chief Executive Officer

I think in terms of senior housing, you will see the development of combination properties as our focal point. We also think there are certain types of services that can be... that will continue be desirable in a freestanding setting such as the dementia care. So you may see us continue to develop some more of that as well.

Philip Martin - Cantor Fitzgerald

Okay. So a lot of this is going to be creating rather than acquiring and adding to --

George L. Chapman - Chairman and Chief Executive Officer

We're already... we include in our development pipeline the additions to existing CCRC's and adding facilities to existing, for example, a skill nursing and AL, adding an IL unit to it and then it gradually converts to a permanent kind of financing for us. So it's all over the map. As you look at our $4 billion, shall we say, shadow pipeline, while we certainly think development will be maybe 60% or two-thirds of that number, we are seeing some pretty attractive acquisitions too Philip. I mean 35% to 40% would be our guess as to that shadow pipeline. It could be more. For example, we just closed on the Sea Island CCRC at I think last quarter $55 million, $56 million when somebody had originally put it up for $105 million. So we are also seeing some very attractive transactions out there. But clearly, either one has to add on, so to change the sort of the environment in existing assets or build new to get what we think will be some very attractive state-of-the-art properties going forward.

Philip Martin - Cantor Fitzgerald

Okay. Okay. I have a couple of more questions there, but I'll ask them offline. The last question I have here is just on the MOB number. I just wanted to confirm that was that 2 million square feet or $ 2 billion

George L. Chapman - Chairman and Chief Executive Officer

Scott made clear. It's $2 billion in our sort of shadow pipeline would include both of MOBs and...

Philip Martin - Cantor Fitzgerald

And specialty care

George L. Chapman - Chairman and Chief Executive Officer

... hospitals and that's just a guess. I mean shadow pipeline enhances... it's enhanced probability of getting the deals we are not saying they are coming. Okay it's like a relationship problem. In term the square-to-foot shifts to remain square feet, in terms new MOBs and if you let that out say pouring out the existing and you look at perhaps calling out over time some percentage of existing that aren't going to stand the pace of change. Or I think we are going to have a great very opportunity to have one of the very best MOB portfolios in the sector. And already have a good one.

Philip Martin - Cantor Fitzgerald

Okay, perfect. Thank you again.

Operator

We will next to Tayo Okusanya with UBS.

Omotayo Okusanya - UBS

Good morning gentleman, congratulations on another solid quarter.

George L. Chapman - Chairman and Chief Executive Officer

Thanks Tayo.

Omotayo Okusanya - UBS

Just a couple of questions around development. When I look at the conversion schedule in the supplemental, it seems like some annual conversions have moved over from 2008 to 2009. Just hoping you can give us some color in regards to that.

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

Sure, Tayo, it's Scott, how are you doing? I think you'll always see some minor fluctuations from month-to-month. We have projects change from time-to-time. You can have weather delays, permitting difficulties, or something in particular that moves projects around for... by a few months, minor construction delays. And I think, you are right, our number... this year's conversions did decline slightly from what we were advertising last quarter, but it was only about $40 million that got pushed out to 2009. We had one, just to give you an example, we had one combination rental assisted living facility that got pushed out from November to April for about $18 million. There's another assisted living facility, about $10 million that was pushed from December, projected conversion to April and another $8 million project from December to January. So we're talking only one to four months push out towards the end of the year

Omotayo Okusanya - UBS

Okay, that's helpful. Then the second thing is when I try to reconcile on page 30 of the supplemental, when I look at the development activity... you have development activity going on for 42 projects. But when I look right below that, it was funding [ph] projections. You only have funding projections for 35 projects.

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

Yes, I can help you. I mean the development activity at the top half of that page is any fundings for any projects throughout the entire year, some of which may have converted while the bottom part, the 35, it just represents projects that are currently still under construction.

Omotayo Okusanya - UBS

Okay, that helps. All right, thank you very much.

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

Sure.

Operator

[Operator Instructions]. We will go next to Rob Mains with Morgan Keegan.

Robert Mains - Morgan, Keegan & Company, Inc

Yes, thanks good morning. I had to jump in middle of something. So if I ask something that somebody... that you've already touched, just tell me and I'll talk to you later. Guidance for TIs was down. Anything going on there?

George L. Chapman - Chairman and Chief Executive Officer

Scott, you want me to take that one?

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

We actually didn't hear anything after they said Rob's name. We didn't hear any of the question.

George L. Chapman - Chairman and Chief Executive Officer

Could you repeat that Rob?

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

Temporarily muted.

Robert Mains - Morgan, Keegan & Company, Inc

Yes, sure. Can you hear me now? Guys, can you hear me?

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

No, not very well. We can't you hear you, Rob that well.

Operator

We will go next to Dustin Pizzo with Banc of America Securities.

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

Is that something that, Fred, you could repeat? You heard his question?

Frederick L. Farrar - Executive Vice President

Yes, he asked why the TI guidance went down.

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

Oh, the CapEx numbers. That's really just a minor adjustment related to when our leasing activity occurs. And Fred, I don't know if you want to add any more color, but it's really given more of our leasing activities in the fourth quarter, it's just the latest estimation of when we will have that CapEx and spend the money on CapEx and TIs.

Frederick L. Farrar - Executive Vice President

Yes, I think that handles it; it's just the lag time.

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

Yes.

Dustin Pizzo - Banc of America Securities

Hey, good morning guys. It's Dustin Pizzo with BofA.

George L. Chapman - Chairman and Chief Executive Officer

Hey Dustin.

Dustin Pizzo - Banc of America Securities

Just... I may have missed this as well earlier. I hopped on a little late. As you think about the RIDEA legislation, would buying an operator be something that would interest you or is that a business that you guys want to stay out of generally?

George L. Chapman - Chairman and Chief Executive Officer

I think we are open to any possibilities in terms of using RIDEA. I think I made that clear. We are just going to be fairly considerate in it because of our close relationships with our existing operators. We are going to see... we are going to just see how the market evolves and hopefully we will take advantage of it.

Dustin Pizzo - Banc of America Securities

Okay. And are there any asset types that something like that would appeal to you more in or is it again, just across the board?

George L. Chapman - Chairman and Chief Executive Officer

It's across the board. I think our preference for combination facilities over time would suggest where we probably like to be in that. I guess I would just add that RIDEA is not just without its problems. RIDEA gives on a chance as the lessee to a TRS to capture more of the revenue stream. But the question then is, in hiring an independent manager, is there a sufficient incentive for that manager?

So the key is to do that only when you have a top flight operator who has some incentive arrangements and some disincentive arrangements within the management contract. Absent that, the question is why will a operator work hard enough to produce that extra revenue that will go to our TRS lessee? So I think people have to be a little careful looking at RIDEA. It's not fantasia by any means. I mean people have to be considered in using it.

Dustin Pizzo - Banc of America Securities

Good. Thanks.

George L. Chapman - Chairman and Chief Executive Officer

Thank you

Operator

We will go back to Rob Mains with Morgan Keegan.

Robert Mains - Morgan, Keegan & Company, Inc

Yes, I replaced [ph] the headset I was using there. Is this better?

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

Yes, much better.

Robert Mains - Morgan, Keegan & Company, Inc

Okay. The other question I had was given that we are seeing CTI levels recently that we haven't seen in a few years, and I don't... looking at your portfolio, I don't know where most of your lease are capped. But might we be looking at if CTI stays where it is now, any kind of movement up in your annual bumps, or don't you think that will be material?

George L. Chapman - Chairman and Chief Executive Officer

Most of them have ceilings on them. I wouldn't anticipate any material increase in earnings growth as a result of higher inflation. We may see some in the private pay area where we share a little bit, but it's not going to be a material number.

Robert Mains - Morgan, Keegan & Company, Inc

Okay, thanks.

Operator

With no further questions in the queue, I'll turn the conference back over to Mr. George Chapman for any additional or closing remarks.

George L. Chapman - Chairman and Chief Executive Officer

We'd just like to thank everybody for participating in our call and Scott and others will be available if you wish to follow up. Thanks very much.

Operator

Once again, that does conclude today's presentation. We thank you for your participation and you may now disconnect.

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