Apr 30, 2010
Executives
David Smith - IR Debra Cafaro - Chairman, President and CEO Ray Lewis - EVP and CIO Rick Schweinhart - EVP and CFO
Analysts
Michael Bilerman - Citi David Shamas - Citigroup Craig Schmidt - Bank of America Jerry Doctrow - Stifel Nicolaus Brian Sekino - Barclays Capital Karin Ford - KeyBanc Rich Anderson - BMO Capital Markets Omotayo Okusanya - Jefferies & Co. Rob Mains - Morgan Keegan
Operator
Good day, ladies and gentlemen and welcome to the Q1 2010 Ventas earnings conference call. My name is Tamina and I will be your operator for today.
At this time, all participants are listen only mode. Later, we will conduct a question-and-answer session.
(Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr.
David Smith. Please proceed, sir.
David Smith
Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31st, 2010. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call maybe considered forward-looking statements within the meaning under Federal Securities Laws.
These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties, and contingencies and stockholders and others should recognize that actual results may differ materially from the company's expectations whether expressed or implied.
We refer you to the company's reports filed with the Securities and Exchange Commission including the company's Annual Report on Form 10-K for the year ended December 31st, 2009 and the company's other reports filed periodically with the SEC for discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management.
The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly, any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure as well as the company supplementary disclosure schedule are available in the investor relations sections of our web site at www.ventasrate.com.
I will now turn the call to Debra Cafaro, Chairman, President and CEO of the company.
Debra Cafaro
Thanks David and good morning to all of our share holders and participants and welcome to the Ventas 2010 first quarter earnings call. My Ventas colleagues and I are pleased to be joining you today from our Chicago office.
Today, we will have a brief overview of the quarter followed by a portfolio performance review and investment outlook from Ray Lewis and a detailed discussed of financial results from Rich Schweinhart. After our prepared remarks, we will be happy to answer your questions.
Ventas first quarter results showed continued strong and improving financial results including and normalized FSO per share at $0.57 at the clinical growth rate of 1.6% in an ally for our Sunrise managed portfolio and reliable and increasing rent in our tripe net leased portfolio. Overall, our portfolio of high quality productive senior housing and house care assets enjoying 4.3% same store cash NOI growth in the quarter compared to last year.
During the quarter, we were very pleased to share our growing cash flows with our stock holders by paying the cash dividends at annual rate at $2.14 per share. This represents a 4.4% increase from our 2009 dividend level and demonstrates the confidence we have in our company, our assets our assets and our process.
We have also made continued significant progress on the credit rating and liquidity side. We believe strongly and have stated consistently that reducing our cost of capital and managing risk.
Our team measures of our ability to succeed on behalf of shareholders. Having three investment grade ratings and a recent positive outlook revision for S&P will help us achieve our goal of lower debt cost.
They also serve as important indicator that we continue to manage the firm prudently on your behalf. Turning to our balance sheet, our unsecured line of credit stand at a $1 billion of committed capital, maturing in 2012.
We have received a total of $410 million in additional commitment since we extended our line in March 2009 including over 200 million of additional commitments received from the beginning of this year. This liquidity condition creates excellent financial flexibility and provides a ready source of capital progress.
We are sincerely delighted to have a great lineup of quality vendor, those long time Ventas supporters and new institutions backing us on with their participation in our line of credit. Finally, I want to emphasize the consistency and reliability of a tax growth in the health care and senior housing real estate phase.
Throughout the recent and severe economic downturn, Ventas delivered positive same store underlying growth and FFO. And our ability to deliver the carrier returns to stakeholders is not limited to recessionary period.
In fact, healthcare race for the top performing sector for the tax re-size and tenure period all of all real property factors. Our business model relationship, rate management team and financial strength should allow us to drive in a variety of economic capital market and reimbursement environment.
The healthcare real estate representing a $700 billion growing market, Ventas is an excellent position to capitalize on opportunities and it continues to build shareholder value. Ray?
Ray Lewis
Thanks Debby. Our diversified portfolio high-quality healthcare and seniors housing assents exhibited another strong performance during the first quarter, driven by cash flow growth in both our triple-net leased and third-party managed operating portfolios.
You recall that 75% of our NOI come from our pool mobile facility maps releases with credit and structural support that can track growth escalations. Another 23% comes from our high quality operating portfolio of senior housing and MOB assets.
During the first quarter of 2010, same store cash NOI under 397 assets and our triple-net leased portfolio increased by 2.85 over the first quarter of 2009. Cash NOI in our hospitals grew 2.6%, senior’s housing grew 2.7% and skilled nursing delivered 3% growth versus the prior period.
Ventas’ triple-net lease-to-assets continue to displace stable cash flow coverage of 1.8 times through the fourth quarter of 2009, the latest date reported. It is important to remember that Ventas has cash flows for rent from our triple-net leased tenant are not affected by as in flows and our operator’s cash flows due to changes in the operating results or reimbursement.
We are the most senior obligation in our tenant’s capital structure and are large pool guaranteed master leases are designed to anticipate and absorb changed in tenant EBITDA overtime. That is why our triple-net leased cash flow conjunction system and reliable growth year-after-year.
Our triple-net lease portfolio has very limited near-term maturities. The weighted average remaining lease term for our triple-net leased assets is approximately 6.5 years and only 1% of our triple-net portfolio is up for renewal before 2013.
So our triple-net leased portfolio continued to perform very well and beyond track to provide same store cash growth in 2010 exceeding 2.5% consistent with what we have said in our February call. Now let's turn to our operating portfolio which consists of 79 high end mansion style system living communities managed by Sunrise Senior living and 26 medical office building.
Performance in our combined operating portfolio is also very strong with annualized growth in the first quarter of 2010 of 16.6% versus the first quarter of 2009, up from a combination of both acquisition and improving fundamental. First, I will discuss our portfolio at senior housing community managed by Sunrise from which we derived 18% of our ST level NOI.
These communities delivered $33.8 million of NOI in the first quarter, an increase of $500,000 or 1.6% over the fourth quarter of 2009 despite the fact that first quarter had two fewer days. Perhaps more encouraging is the fact that Sunrise NOI grew 11% on year-over-year basis.
In each case, NOI improvements in our Sunrise portfolio were driven by higher rate and higher margin. During the quarter, we saw positive trends in average daily rate as many of our U.S.
communities were able to increase resident rate on the first of the year. At the first quarter, average daily rate was $178, up 2.4% over the fourth quarter, year-over-year, the ADR increased 4.8%, driven by a combination of annual rate increases and favorable changes in the Canadian exchange rate.
Margins in the portfolio also trended positively during the first quarter, increasing 50 basis points, 31.3% sequentially, notably margin also showed an improvement of 170 basis point over the first quarter of 2009. NOI for 78 stable communities improved this quarter, rising to $33.1 million, an increase of 10% year-over-year and 1% sequentially.
Occupancy softened to 88.4% down 40 basis points compared to the fourth quarter and 60 basis points compared to last year. Our loan lease of asset had a great quarter.
Steel at the high end independent living and assisted living building in Toronto NOI occupancy and rate at this property all improved significantly versus prior period as the building continues to trend towards stabilization. So to sum it up our Sunrise portfolio has started the year well and is in line with our previously issued NOI guidance of $128 to $138 million.
The rest of Ventas’ operating portfolio is comprised of over 1.7 million square feet of medical office buildings which accounts for about 5% of our total NOI. This portfolio of which over 80% is located on campuses of major hospital systems again provided stable and growing cash flow for Ventas.
Starting with our same store stabilized pool of 18 medical office buildings, Ventas share of NOI in the first quarter increased both sequentially by 2.1% and year-over-year by over 11% to $4.7 million. Same store medical office building NOI of $4.9 million increased sequentially by 2.1% and year-over-year by 4.3%.
Margins also improved compared to prior periods. Occupancy at our medical office building remains strong at over 94% and rents remain stable over the prior period.
We had one property our 93% lease property in Aventura, Florida moved from lease up to stabilize during the first quarter bringing our total stabilized portfolio to 22 buildings and 1.4 million square feet. Our four remaining properties and lease up continue to show positive leasing momentum and perform in line with expectations.
Leasing prospects for this portfolio remained positive including 47,000 square feet of leases assigned but not yet an occupancy and a solid forward pipeline of potential tenants. When tenants who have already signed leases move in the occupancy in our four medical office building lease of asset sure to rise from 73% to over 87% and we expect occupancy to increase in our leased portfolio to over 90% in the next 12 months.
So we are pleased with the company’s progress in medical office. Our portfolio has ground to over 1.7 million square feet accounts for 5% of our total NOI continues to provide reliable and growing cash flow and is currently generating an un-leveraged yield on investment of over 8.5.
We continue to believe that MOBs present a compelling long term investment thesis. The sector will be fueled by the baby boomer demographic that is turning 65, and becoming Medicare eligible in 2011 additionally this over 65 population is also growing at three times the rate of the total population over the next 10 years.
We believe that over time health care reform in increasing coverage for the uninsured will also increase utilization of outpatient health care facilities such as medical office building And finally as health care providers continue to seek ways of generating capital; we expect to see a continued trend of hospital asset monetization that will transfer ownership to more efficient holder of real-estate such as health care we expect that this area will continue to be a focus for us in 2010. While we are on that topic, let’s turn it to the acquisition outlook for a moment.
You may recall that we began to ramp up our investment level during the second half of 2009 and during the first quarter we began to see an increase in the number of opportunities coming to market. Improvements in both the debt and equity capital market should lead to an increasing number of transactions being completed in the market as the year goes on.
However given the improving general economic environment the amount of capital looking to invest in cash flow and real-estate and the strong underlying fundamentals of health-care and senior housing, we expected that acquisitions, the market for acquisition will be increasingly competitive, we have positioned the company well for 16 by creating an investment great balance sheet with tremendous liquidity and access to multiple low cost sources of capital. We are currently working on a variety of investments opportunities both large and small.
With our resources financial strength and relationships we are committed further growing and diversifying our business in 2010. With that I will turn the call over to Richard Schweinhart and to discuss our financial results, Rick?
Rick Schweinhart
Thank you Ray, the highlights of the first quarter are that operating income was up from last years first quarter and increased also compared to the fourth quarter. First quarter normalized FFO was $0.67 per diluted share.
Additionally we continue to focus on the gaining strong balance sheet double liquidity and increasing cash flow from operations. At March 31, our cash balance was $133 million and we have only $38 million outstanding on a revolving credit facility.
Currently we have $992 million of undrawn availability and cash on hand is approximately $126 million. Our credit status remained excellent with net debt to pro-forma EBITDA to 4.1 tons and our fixed charge coverage ratio at 3.2 times.
Our March 31, 2010 debt to enterprise value is 27%, our cash flow from operations for the quarter ended March 31, 2010, increased to 116 million from a 114 million with a comparable quarter last year and 99 million in the fourth quarter. Details of the first quarter earnings are normalized FFO was $105.2 million or $0.67 per diluted share.
Normalize FFO experienced $2.2 million consisting of merger related expenses, deal cost and income tax benefit. First quarter normalized FFO increased from last years first quarter due to NOI increases in all three of our portfolios, triple net sunrise managed and medical office building and rollover interest expense.
Triple net lease revenues grew to $117.0 million from $114.1 million primarily due to contractual escalations. Under NOI increased 11%, to $33.8 million this quarter from $30.5 million last year.
Also year-over-year our medical office building NOI grew to $8 million from $5.4 million primarily due to acquisitions. Interest expense decrease to $44.3 million from $45.9 million in the first quarter last primarily as a result of lower debt balances in the forward.
G&A and stock based compensation was fairly flat of last year. Weighted average shares outstanding in the quarter at 157 million increased 10% over first quarter of last year due to our second quarter of 2009 equity issuance and remained fairly flat versus $156.7 million in the fourth.
First quarter had for diluted share increased to $0.65 compared to 40.64 in the first quarter last year and $0.62 in the fourth quarter. We are reaffirming our 2010 normalized FFO per diluted share guidance at $2.69 to $2.75.
We continue to see year-over-year growth in our earnings per share even though we have 3% more shares outstanding for the year. This positive trend as indicative of the growing and reliable cash flows, where our diversified high quality and productive portfolio of healthcare and senior housing continues to provide.
Our key assumptions for our 2010 normalized FFO for share guidance haven’t changed. They are total sunrise NOI for our 79 assets ranges from $128 million to $138 million, G&A expenses ranges between $39 million and $41 million and we invest our cash on hand by mid year.
But our guidance does not include other material acquisitions or divestiture activity. Deal costs, capital transaction or litigation expenses are proceeds.
Operator, if you will please open the call for question.
Operator
(Operator Instructions). Our first question comes from Michael Bilerman with Citi.
Please proceed.
Michael Bilerman - Citi
Hi, good morning guys, this is David Shamas here with Michael. With respect to the margins in senior housing, and I guess medical office as well, in the past you guys mentioned that you expected them to come down.
But it looks like it actually went the other way, so was it really one time items driving that? Or should we expect that going forward?
Richard Schweinhart
No, the margins have with respect to the senior housing assets in many ways, David, the margins have pretty consistently trended or arranged within the 30 to 33% range. I think we’re pretty squarely in the middle of that range, from quarter-to-quarter you may get some fluctuation of margins depending upon expense, trend, seasonality et cetera but I wouldn't draw any particular conclusion from the margins in this quarter, I think they are within our normal tolerances.
David Shamas - Citigroup
Just turning to opportunities, can you just give a little bit color about what you are seeing in the market right now with respect to enterprise level or just operating transactions and what's your appetite right now for larger scale deals?
Rick Schweinhart
Sure, as I said in my opening remarks, the improving economic conditions are definitely going to leave the increase in transaction activity, we are seeing a pipeline building in both large and individual property transaction across all sectors, we are still very interested and continue to grow and diversify our company, we find good large transactions that are strategic fit for us, we are going to pursue them aggressively.
David Shamas - Citigroup
And you mentioned earlier that obviously it is going to get a lot more competitive with respect to the amount of potential buyers. So have your expectations for pricing shifted at all, as a result?
Rick Schweinhart
Yes, I think pricing is going to be competitive for transactions, I think we positioned the company well to compete in that situation, we have low cost to capital, access to multiple capital markets and undrawn revolver, a strong balance sheet with plenty of leverage capacity. So I do expect that the market is going to be competitive, but I think we are very well positioned to succeed.
Operator
Our following question comes from the line of Craig Schmidt with Bank of America.
Craig Schmidt - Bank of America
Just a little more clarity on the acquisition market. Do you feel like you are looking at as many deals as you hoped to be looking at?
It is just that it is getting more competitive that might limit the amount of transactions you do? Or are private holders of healthcare real estate not really bringing their assets to sale?
Rick Schweinhart
So Craig I think that’s an important point. The pipeline is active, it’s full, I think transactions are still taking a little bit longer, there’s a little bit of a price discovery exercise going on right now between buyers and sellers.
There’s also the effect of improving markets tend to cause sellers to delay their decisions. If you wait a little bit longer, you might get a little bit better deal and so I think what we are seeing is the beginning of the activity, but I don’t really expect it to turn into transactions happening until perhaps later in the year, but we are definitely seeing a lot of inbound inquiries, we are working on stuff, we are going to preliminary pricing exercises and things that will I think lead to good transaction volume down the road.
Craig Schmidt - Bank of America
Where do you think the Sunrise portfolio might end occupancy by the end of this year?
Rick Schweinhart
I think what we’ve said as we’ve provided our guidance is that occupancy will be up slightly from where it ended last year. So I think again I think it will be up slightly, it’s not going to be a big driver this year.
Operator
Our following question comes from Jerry Doctrow with Stifel Nicolaus.
Jerry Doctrow - Stifel Nicolaus
Looks like you actually increased your investments in loans in the quarter. I just wanted to get your take, confirm that that is indeed, what happened and just get your sense of what was going on there?
Debra Cafaro
We invested about $27 million to $28 million in quarter and calling half of that within the loan and half of it is in the senior housing asset.
Jerry Doctrow - Stifel Nicolaus
What makes loans interesting at this point, are the yields better, or is it for property level stuff? Are you funding operating?
Just a little more color?
Debra Cafaro
It’s small mortgage, first mortgage debt that has really great, we believe great risk-adjusted return.
Jerry Doctrow - Stifel Nicolaus
And a couple we have already talked about sort of investment prospects. In terms of property types, I think of you guys as sort of focusing more on MOB as kind of being your first choice.
If you have a sense of priorities, what kind of property types you focused on?
Rick Schweinhart
MOBs are focus of ours given the opening remarks. We like that sector a lot; we have an investment thesis there that is based on strong growth and demand for that real estate going forward.
We really like seniors housing as well. We think the fundamentals in the market are excellent from a supply and demand perspective and we think that in a recovering economy, those assets are poised to do very well.
We think there’s going to be some good opportunities in skilled nursing as a number of the private equity firms who have made investments in that space over the last three to five years, look to get liquid. So we think there will be transaction volume and interesting opportunities in that space.
So I think MOBs is an area that we like, but skilled nursing and seniors housing are certainly attractive to us as well.
Jerry Doctrow - Stifel Nicolaus
If you had your druthers, would you remake the portfolio to further increase the non-triple net stuff the operating assets?
Debra Cafaro
Depends on the opportunity.
Jerry Doctrow - Stifel Nicolaus
CapEx was a little bit lower than we expected this quarter. Do we expect that to sort of ramp up?
I don't know if you provide guidance in that area or not?
Ray Lewis
Reset with respect to our Sunrise portfolio Jerry? Or just generally?
Jerry Doctrow - Stifel Nicolaus
I think generally. But Sunrise may be the bulk of it.
Ray Lewis
Yeah I think that’s right. The CapEx is typically built towards the end of year.
You start the year with your budgets and projects get kicked off and then you stand and complete those projects as the year goes on, so I would expect that to increase through the balance of the year.
Operator
Our following question comes from Brian Sekino with Barclays Capital.
Brian Sekino - Barclays Capital
I just wanted to make sure my math is right. With your current guidance for the Sunrise portfolio, 128 to 138, with the results you did in the quarter, kind of at the mid-point, the remainder of the year, your NOI could be slightly down, is that correct?
Rick Schweinhart
So Brian I think, we provided you with that guidance in our call on February. As we look at the first quarter certainly squarely within the range, we are happy about that, you know the 128 to 138 we still feel very comfortable with that as the range and as the year plays out we would be happy to update that guidance as that becomes more clear what the balance of the year holds for us?
Brian Sekino - Barclays Capital
Okay. Then just shifting over to the acquisitions that you mentioned, I know someone mentioned about the RIDEA structure becoming more in play.
Are you seeing competition increase also for buyers looking to do that kind of structure? And maybe that might be a way to keep pricing where you are willing to do it?
Make acquisitions?
Rick Schweinhart
I think I follow your question. The RIDEA structure is not really a new structure, it’s been in the market place for a long time.
Private equity firms have been doing managed deals for a long period of time. So we are not really seeing any change I think in the market place in terms of either people offering more RIDEA structures, people asking for more RIDEA structures.
I think it really goes back to whether or not the asset has more dynamic cash flows and if it does, maybe appropriate for the REIT to employ a RIDEA structure on that assets, so if it’s an expansion or something where the cash flows are going up, you might want to do a RIDEA structure participate in that. And if it’s a asset with more static cash flows where you are more likely to track CPI overtime then it’s probably more suitable for a triple net lease structure.
Debra Cafaro
I am going to compliment my colleagues here. And we really have a lot of continuity with excellent members of our senior management team who have tremendous field structuring capabilities.
I mean that includes our Head of Tax, Brian Wood and we have a lot of proprietary capital and deal structuring experience that really allows us to be very competitive in all kinds of situations because we are really able and willing to do the work to figure out the structure that that works for a seller. And that’s a tremendous advantage in the deal market, particularly, in larger transaction.
Operator
Our following question comes from the line of Karin Ford with KeyBanc.
Karin Ford - KeyBanc
I wanted to re-ask that Sunrise guidance question, maybe a slightly different way. If you annualize the first quarter NOI, you get something like $135 million or so of NOI.
And you mentioned I think previously, that 1Q is a seasonally low quarter, you are getting some lease up and steals, is it sort of, are we thinking about this right? Are you really heading toward the top end of that range?
Rick Schweinhart
I guess, I can’t really answer that any differently, Karin. Like I said we are a month or two into having just provided that guidance, the portfolio is performing well.
We’re happy with that and as the year continues to play out then we’ll be happy to update the guidance.
Karin Ford - KeyBanc
The next question was just on lease term fees, you mentioned in the press release you are expecting some associated with the asset sales you are in the process of. How much will they be in and is that include in your FFO guidance?
Debra Cafaro
It is as it always has been as we have sold assets it is a de minimis amount Karin, a couple of hundred thousand.
Karin Ford - KeyBanc
Okay. Just final question is for you Deb, how much time would you say you’re spending these days on the General Growth Board?
Debra Cafaro
Well, that’s my second shift, when I grew up in Pittsburgh a lot of people worked two jobs. I am spending an appropriate amount of time on the GGP Board and now the time I am not spending working on Ventas so the only people who seem to be complaining at the moment are my family.
Operator
Our following question comes from the line of Rich Anderson with BMO Capital Markets, please proceed.
Rich Anderson - BMO Capital Markets
So on the credit rating news and all that, good stuff obviously for your firm but with that comes some loss flexibility. And I was just wondering how much, you talked about liquidity, $1.1 billion or whatever, how much of that is really available to you before you have to raise equity to do something in order to keep your credit status?
Debra Cafaro
I am really glad you raised the investment grade rating because as you know we’ve really been committed to moving up the credit curve. And we were really happy to get recognized for that at lower our cost to debt which at the end of the day it's really what it's all about because we want to use that to make more money for shareholders.
So I don't believe that it reduces our flexibility at all. And I think we’ve always managed the company to really be an investment grade quality company, I think we’ve had really excellent balance sheet and risk management which we would expect to continue.
And so I only see the rating agencies to doing any constraints on that, that are not goals that we set for ourselves, which is release and balance, growing tax growth and continually managing risk and that's what we always do and that we will continue to do. So if you look at what we’ve said to all constituencies at overtime we would expect to manage the firm at about a five times EBITDA level we are about four times now.
And then over time that could vary may be a turn plus or minus for short periods of time so if you look at that and at about $5 billion. I’ve read about five times I think we have $1 billion or more of investment capacity even just to get to the five times.
And so I feel really good about where we are.
Rich Anderson - BMO Capital Markets
Turning to the HCP legal discussion and I know I won't get into any more details about the specifics of it. But every quarter and with every motion and you appeal and all that, you are whittling away at whatever you might get out of that.
At what point does this whole process become almost too burdensome in that when you net all the costs associated with it, that it becomes not so much for shareholders?
Debra Cafaro
Well we have always tried to make the best decisions that we can for shareholders and I would say that today our investment has certainly produced an exceptional return, assuming that we can maintain that. And now we are in the appeals process.
And I would say the costs are de minimis but the bottom-line is that if we haven’t verdict, a unanimous jury verdict for over a $100 million in our favor that secured by a letter of credit. And we feel an obligation to realize on that judgment and we will expand the appropriate amount of resources to do so.
Rich Anderson - BMO Capital Markets
To Ray, on Sunrise, is 9.9% same-store NOI growth sustainable, in your opinion? Or is that kind of like at the very top end, or beyond the top end of what you would expect for the year?
Ray Lewis
Yeah the first quarter of last year, Rich was probably the lowest quarter in terms of NOI since we have owned the portfolio so you obviously get a benefit of our growing off of a low base. So, no I wouldn’t expect that to be sort of the implied growth rate going forward, but certainly the performance at the properties has been st6eadily improving since the second quarter of last year and that’s encouraging.
Debra Cafaro
And I think if you look at our 2010 guidance range compared to resolve from last year and you can see what our expectations for this growth for this year making.
Rich Anderson - BMO Capital Markets
And then last question kind of following on Karin’s last question about time spend on the GGP board. You are also Chair of NAREIT, I guess, it seems like you have time on your hands or you run out of books to read I mean.
Debra Cafaro
That is the funniest thing I have ever had because I have no time on my hands.
Rich Anderson - BMO Capital Markets
Well one thing I am noticing from this call and correct me if this is, it shouldn’t be taking anymore in the coincidence is Ray spending a lot more, it seems to be more visible on the call. Can you comment on all about session or anything like that?
Debra Cafaro
I think that my first of fall in GGP and NAREIT et cetera my parents just gave me a ridiculous work ethic with that continued to try do enjoy and I am. So I feel very engaged in all the activities that I’m involved in.
And in terms of the team I really do think that our shareholders should appreciate and our team should be visible. We have a great team that’s been here.
Our team’s been here so as to gather since ‘01, ‘02 we’ve enjoyed a lot and shared success and I think its important for everybody to realize how many different and important contributions are made by everyone including but not limited to Ray. So we’ll add that you are getting to see that because it’s an important strength to the company.
Operator
Following question comes from the line of Omotayo Okusanya with Jefferies, please proceed.
Omotayo Okusanya - Jefferies & Co.
Couple of questions just in regards to 2010 guidance I just wanted to make sure I heard right that part of your assumptions are you will put your cash to use in the second half of 2010, did I hear that correctly?
Debra Cafaro
Yes and that’s exactly what we said at the beginning of the year while when we initiated the guidance.
Omotayo Okusanya - Jefferies & Co.
Debbie and Ray, there is a lot of kind of noise in the newspaper nowadays of again several states having budget problems. Are you seeing anything in regards to potential impact of that situation on Medicaid rates by any chance?
Have you started to see anything?
Debra Cafaro
There is a couple of things going on, puts and takes on Medicaid. The last couple of years including in connection with the healthcare reform bill, the federal government has extended, I think $25 billion or more in FMAC payments which are mapping funds to the state Medicaid program.
So, that’s the policy that these are obviously feeling the impact of the recession and so there are differences so, those kind of balance out and we are seeing kind of relatively steady Medicaid rate and overtime what we have seen as Medicaid rates range from the annual increases of zero to, when I first got here rates was increasing by 9%. So, we typically assume Medicaid at sort of an inflationary level and it kind of goes up and down overtime and doesn’t really affect out rents, because they are so well covered and we have credits that work at various points and time changes in reimbursement to compress or extend margin at our operators.
But again that doesn’t really affect our rent which continues to be secured and reliable.
Omotayo Okusanya - Jefferies & Co.
So at this point that you don’t have like any major concern of several states cutting Medicaid rates significantly that could impact the tenant that has major exposure to those states?
Debra Cafaro
Right we agree that we feel fine about it and I would tell you that that’s one important reason that we had geographical diversification at that type of diversification. We don’t really feel the effect directly or even indirectly from single or even a couple of changes in reimbursements.
Omotayo Okusanya - Jefferies & Co.
Next question, Debby are you feeling any better or worse in regards to the overall financial help or financial condition of Sunrise?
Debra Cafaro
Well I think Sunrise has done some really important thing on the capital side to improve its condition considerably. And its equity value has reflected that and there are number of things that Mark Ordan has done under very challenging circumstances and has been absolutely superb and stabilizing the company.
And so I do think certainly as compared to last year, here is the result of what he has done have really put Sunrise in a more sustainable financial condition.
Omotayo Okusanya - Jefferies & Co.
But Sunrise remain to be still has quite a lot of debt that’s coming due this year. Do you have any general sense of how it could end up addressing that issue?
Debra Cafaro
Well I think that that’s really a question for them but if they do have this well and that is they have done in everything to-date under much worse external circumstances, I think that they will manage through that.
Omotayo Okusanya - Jefferies & Co.
Last questions, Deb. Just in regards to tenants diversification, you guys will have a high amount of concentration between Sunrise, Kindred and Brookdale, just kind of thinking as you’re thinking about acquisitions going forward, if there are any plans you kind of address that and become even more diversified by tenant lease.
Debra Cafaro
As we grow the company, almost by default, you’ll see as a private figure, the existing tenant, the amount of NOI we derived from those three tenants. So, naturally shrink.
I have to tell you and particularly risk with Kindred and Brookdale are the leaders in their industry and they’re excellent share provider and I feel very fortunate that we do have a lot of our NOI coming from them and our friends at Sunrise continues to be really the only brand globally and to your housing. So I do feel good about this three operators and peer providers that we have that overtime, we absolutely want to continue to grow and diversify.
And I think that will happen naturally as we make additional investment.
Operator
And the following question comes from the line of Rob Mains with Morgan Keegan. Please proceed.
Rob Mains - Morgan Keegan
Yeah, thanks. Have question circling back I think to the first question on the Sunrise margin.
Some operators have been talking about the weather in first quarter. Can I surmise from the strong margins you were able to put up with either?
It was that big of an issue or I know that you got a fair amount in Canada and I assume that Canada like up here had a real mild winner where it was the whole utilities issue, not that big of a problem for you or were there other offset else where?
Rick Schweinhart
Rob I think, its important to note that the single largest driver for us and expenses is labor. So that’s when we see efficiencies in typically mostly driven by labor.
I will say that sequentially utilities, we got a little bit of a pick up in the utilities. So, there was some benefit there but I wouldn’t consider it a driver.
Operator
Okay. I'm showing no further questions.
I would now like to turn it back over Debra for any closing remarks.
Debra Cafaro
Thanks Tamina. Well, thanks to all of our shareholders and other participants for joining us today.
As always, we continue to be sincerely grateful for you participation and your support to the company. And we are really looking forward welcoming you to Chicago in June.
Look forward to seeing you. Thank you.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you for you participation.
You may now disconnect and have a wonderful day.