Feb 25, 2010
Executives
Jim Bowe - VP of Communications George Chapman - Chairman, CEO & President John Thomas - EVP of Medical Facilities Scott Estes, Executive VP & CFO
Analysts
Andrew Ryu - Banc of America Merrill Lynch Rich Anderson - BMO Capital Markets Dustin Pizzo - UBS Securities Rob Mains - Morgan Keegan Omotayo Okusanya - Jefferies & Co Todd Stender - Wells Fargo Securities Dan Bernstein - Stifel Nicolaus
Operator
Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-end 2009 Health Care REIT earnings conference call. My name is Christie and I will be your operator today.
At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
(Operator Instructions) As reminder, this conference is being recorded for replay purposes. Now, I would like to turn the call over to Mr.
Jim Bowe, Vice President of Communications for Health Care REIT. Please go ahead, sir.
Jim Bowe
Thank you, Christie. Good morning everyone and thank you for joining us today for Health Care REIT's fourth quarter 2009 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'd 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.
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 projected results will be obtained.
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 would now like to turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT for his opening remarks.
Please go ahead, George.
George Chapman
Thanks Jim. Before discussing our successful efforts to position the company for the future, let me review a few 2009 highlights leaving the more detailed commentary to Scott Estes.
First, in light of a difficult economic times, we were quite pleased with the one and three-year total stock holder returns of 12% and 21% respectively and our inclusion in the S&P 500 index in January of last year in ranking as one of the top ten total return performers for the decade. Among our rates we're also very gratifying to management.
Secondly, while the unsecured note markets remained effectively closed at least through to the first half in 2009, we were able to opportunistically raise nearly $1.3 billion of capital to $700 million of equity, $266 million of Freddie Mac secured debt at an average rate of 6% and so of non-core assets that generated over a $325 million of proceeds. Thirdly, we completed gross investments in $717 million of which nearly 90% related to our preferred investments in combination senior housing facilities and customer focused medical facilities.
But today I want to focus my remarks on what we've accomplished during the last several years to position and competing for success. As we've reported, we've taken advantage of these difficult economics times to restructure the balance sheet by enhancing liquidity, lengthening maturities and deleveraging.
With only a $140 million drawn against our $1.15 billion line of credit at the end of the last year and with that equity markets open, we are in a great position to take advantage of investment opportunities. We have also methodically positioned our portfolio and corporate infrastructure to meet the challenges ahead and to take advantage of opportunities even during the last several years of difficulties we chose to bolster our capabilities through to numerous key hires that are providing significant competitive advantages for Health Care REIT.
Our portfolio has proved to be quite resilient through these challenging times as our payment coverages at the property level remained at two to one. We continue to emphasize portfolio diversification as our top five and ten operators comprised only 24% and 37% of the portfolio respectively.
We are also quite pleased with the performance of our medical office building portfolio that finished the year over 91% occupied with an average 2009 tenet retention rate of 75%. You will recall that we acquired a two large MOB portfolios as well as our property management capabilities several years and embarked on a process to produce the best MOB portfolio as well as the best most talented property management company in the sector, and we've made great progress as we've added and are continuing to add modern larger customer focused MOB's medical office buildings while at the same time disposing off non-core medical office buildings.
We are making great progress in reducing smaller unaffiliated off campus medical office buildings and expect that percentage to decline to 10% in another three to five years. We expect our occupancy to be at least at 93% by year end 2010 and on the management side, our personnel additions have strengthen an already strong property management group led by Mike Noto.
As I mentioned earlier, we've been emphasizing investments in combination projects and senior housing and medical facilities that were customer friendly and all of them being appropriately real estate platforms for the future. At the same time, we've been very aggressive about disposing of non-core assets such as standalone, skilled nursing facilities, independent living facilities, assisted living facilities and certain medical office buildings even when the near term effect was somewhat dilutive.
Let me quickly summarize some of the changes that we've made in our portfolio during the last five years and expect to make in the next five. In 2005, freestanding skilled nursing were at 38% of our portfolio and at the end of 2009, it was down to 17%.
We expect that percentage to be driven down to approximately 10% by the end of 2014. Our freestanding independent living, assisted living and dementia facilities stood at 26% of our portfolio in 2005 and were down to 8% at the end of 2009 and should move to about 5% by the end of 2014.
Our medical facilities that are comprised of medical office buildings and hospitals stood at 4% of our portfolio in 2005 and it were at 36% at the end of 2009, and should be in the 40% to 50% range by the end of 2014. As a part of this portfolio repositioning efforts, we have in the sense contains five years to seven years of portfolio repositioning into two with the effect that gains as well as loan losses and the impairments have been larger than normal for 2008 and 2009.
We've been aggressive in writing down loans and investments even though our goal remains to collect a substantial portion of such amounts. In 2008 and 2009, we had a net gain of approximately $126 million when assets sales, impairments and losses are considered together.
We are now taking advantage of our positioning to grow our portfolio across the full spectrum of senior housing and healthcare. We believe our ability to invest knowledgeably across the full spectrum constitutes a tremendous competitive advantage, and being able to provide full services such as consulting, advising, development and property management in addition to being a capital partner are equally important.
These advantages however can only be leveraged by a team of dedicated seasoned professionals who understand the needs who partner with operators and health systems. Let me be clear, apart from the inherent benefit of appropriate portfolio diversification, the obvious benefit of full spectrum investment is the expanded scope of investment opportunities.
By being able to invest responsively in each segment, we can pursue the best risk reward opportunities as markets change. We entered 2010 focused on growth and we begun that process very effectively by being in the process of closing $568 million of investments including our portfolio of medical office buildings with our existing customers of were our health system.
Senior housing assets with the capital senior living and our life sciences joint venture with Forest City. $490 million has been closed at this day.
We are very pleased to expand our relationship with Aurora, an A rated not for profit health system with 13 hospitals and over 3,000 affiliated physicians in Wisconsin. This portfolio has an attractive initial yield of 9.1% and on a pro forma basis what immediately increased our overall medical office occupancy like 2% to 93% and our on campus and affiliated mix to 80% of the portfolio.
Aurora has become our third largest customer with the total investment balance of $283 million. Our sale lease back transaction with capital senior living will be our first with that company and will hopefully lead to a growing long-term productive relationship.
Our investments in the Forest City joint venture life sciences project constitutes the best in class opportunity in our leading life sciences market in the United States. This purchase is consistent with our strategy of investing in high quality real estate which supports a leading healthcare provider, and John Thomas our head of the medical facility's group will discuss this investment at length in a moment.
So as we enter 2010, we are very optimistic that our people and platform can and will drive strong investment volumes and earnings growth going forward. And with that, I'll now turn to John Thomas to expand on the Forest City investment and then John will turn the program over to Scott Estes, our CFO for a brief financial and portfolio overview.
John?
John Thomas
Thank you, George. We are pleased to talk about our new strategic investment, the University Park at MIT and Cambridge, Massachusetts and our new partner Forest City Enterprises.
Forest City developed University Park in cooperation with MIT over a 25 year period providing research and laboratory facilities for leading life science companies and healthcare institutions seeking a campus environment providing scientific and clinical collaboration and the successful commercialization of that research and that clinical work. The joint ventures client in Universtiy Park include investment grade or subsidiaries of investment grade publicly traded pharmaceutical companies including Novartis, Genzyme, Millennium, a subsidiary of Takeda and our noted University Park the worldwide headquarters for the Takeda's oncology research and business as well as (inaudible) and are very proud with the relationship with Massachusetts General and Brigham and Women's Hospital clinical research operations.
University Park is located adjacent to MIT's campus and has started to lead ground links with MIT for more than 50 years. This $668 million joint venture includes all seven of cities [ph] wholly on life science buildings with two attached parking garages with more than 1,700 spaces.
The joint venture was formed February 22 with approximately 1.2 million rentable square feet, 100% occupied and projected 2010 cash net operating income of $51 million. Please note $4.7 million of the projected NOI is contributed by the garages.
The joint venture acquired 6 of the 7 buildings this past Monday, but these numbers are inclusive of the 7th building which we expect will be contributed in the second quarter. The average age of these buildings is 11 years and backing up the value of the garages the investment preferred is about $510 per rentable square foot well below today's replacement cost.
The joint venture has no preferred or promoted returns to foresee the health care and the projected 51 million in net operating income is net of all ground lease payments to MIT and property management fees payable by the tenants to Forest City which will continue to manage the properties for the joint venture. Forest City will receive an annual asset management fee from the joint venture equal to 50 basis points of the net operating income for managing the joint venture the future annual increases subject to a CTI adjustment.
The joint venture assumed $321 million of non-recourse debt with the weighted average interest rate of 7.1% and an average term of 4 years remaining. Forest City has maintained a 100% occupancy consistently for over 11 years and has renewed or released spaces then current market rates with minimal downturns.
First innovation leases in place typically are 10 years with second generation at five years on average. All of these buildings have been very well maintained and are built out fully.
Thus in the rare situations when space has been available new tenants have been able to move into ready space without additional tenant improvement cost or delay for build out. This is a very attractive asset for both investment and tenants alike.
We are able to determine [ph] market and build our costs for new land space far in excess and typical landlord allowances in the market. Our initial investment with Forest City by intermediate returns on investment and we expect annual average net operating income growth of 4% to 5% over the next 5 to 10 years resulting in a 10 year unlabored IRR of 9% to 10%.
Forest City’s life sciences management team based in Cambridge and provides over 90 years of combined experience to our joint venture. This team has led the effort to expand Forest City’s life sciences development beyond Cambridge to an alliance with Johns Hopkins University for the development of the science and technology park at Johns Hopkins in Baltimore.
The University of Pennsylvania and Philadelphia and the (inaudible) Life Sciences anchored by the University of Colorado Hospital and its health sciences center. They also have the Illinois science and technology park with ties to Northwestern University and another Chicago Hospital located in the Chicago market.
As Health Care REIT continues to grow traditional future investments with leading hospitals and academic Medical Centers, we believe that it’s a logical extension of our services and important strategic initiative to deliver to our hospital clients the full spectrum of the health care facility they require to further their mission. While I personally serve the better [ph] health care system I had the privilege and responsibility to work with some of the leading scientists in the world along with the opportunity to work with some of the leading physicians in the world and the development of vaccines and other chemical biological clinical technology.
Taking scientific advantage from the bench to the bed as quickly and efficiently as possible has become a key driver of the success and growth of the highest quality hospitals in the United States. Recruiting the highest quality physicians has required these institutions to offer not only modern efficient clinical facilities, but access to adjacent and complementary labs and scientists and ultimately the pharmaceutical and other life sciences companies, seeking to fund the research and the clinical trials necessary for FDA approval and commercialization.
This joint venture provides to us a rather exceptional opportunity and best in class congregation of life science buildings in the United States and partner with a best in class developer and manager of life sciences properties. Forest City has already taken the proven team and platform to other leading academic health care providers and over time in a disciplined and strategic manner, we expect to grow our life science investment with Forest City and our mutual clients.
This partnership offers a strategic advantage for Health Care REIT and Forest City across each of our respective core competencies. We expect to leverage our collective strengths to have even more opportunities to own and develop more high quality out patient and other traditional acute care facilities than we otherwise would.
And in many of those situations to have access to the best opportunities to own and develop leading life sciences facilities as well. Health Care REIT’s foundation for success for four years has been to identify and invest in best in class operators and providers across all classes of health care real estate.
These assets have and can take many forms. These investments have and can take many forms all with one common objective growing Health Care REIT’s shareholder value through investments in the highest quality real estate, hosting the highest quality terms and managing that real estate either directly or in partnership with the highest quality management teams.
University Park meets and exceeds all of those objectives and we are pleased to access this important health care real estate in direct partnership with Forest City. I'll now turn it over to Scott Estes.
Thank you for your time.
Scott Estes
Thanks, John, and good morning everybody. The company ended 2009 in a very strong position with a solid balance sheet, low leverage and liquidity that will provide important flexibility as we begin our next phase of growth.
We’ve continued to diversify and enhance the quality of assets is our portfolio, with most asset classes performing fairly well through year end 2009. Regarding investment activity, we completed $717 million of growth investments during 2009, including $209 million in the fourth quarter.
Fourth quarter acquisitions of $68 million included a skilled nursing property in LTAC and a master leased on campus medical office building at a blended initial yield of 8.3%. Turning to portfolio performance, I'll first review our development progress.
For 2009, we originally anticipated $536 million of completions for the year, that ultimately delivered $734 million of new projects. We now have $660 million of projects under construction with only $212 million left to fund.
Regarding lease up, approximately $185 million of our 2009 development completions were medical office buildings. Upon completion, these projects were 89% pre leased on average and moved directly to the stable portfolio.
In addition I think we made good progress with our senior housing and hospital assets, stabilizing nearly $200 million during the year. In our stable portfolio all three of our senior housing asset classes generated occupancy improvements versus the prior quarter.
Sequential quarterly occupancy increased 60 basis points in our independent living portfolio, 80 basis points in our assisted living portfolio and 40 basis points in our skilled nursing portfolio. Payment coverage also remained strong, with results generally flat versus the prior quarter, with independent living at 1.27 times and assisted living at 1.58 times and skilled nursing at 2.29 times.
Fourth quarter performance thus far suggest continued improvement in occupancy and steady payment coverage across the senior housing portfolio. I'll now provide an update on our entrance fee communities.
We currently have 14 properties with $748 million investment balance as of December 31, representing 12% of the portfolio. Through December, two of these communities were still under construction, while the 12 open communities continue to meet revised entrance fee move-in budgets with 220 total move-ins versus a budget of 221 during 2009.
During the fourth quarter, there were three additional entrance fee properties that converted from construction representing a total investment of $179 million. We are currently recognizing a blended rental yield of 7% on these recent conversions.
And as a result for our 12 open communities with an investment balance of $590 million we continue to recognize an average yield of approximately 6%. Now turning to our Hospital and MOB portfolios; I can say that our hospitals continue to report stable to growing volumes in revenue as the increase in our stable payment coverage by 10 basis points sequentially to 2.47 times, and as George discussed our medical office portfolio also finished the year on a high note with occupancy increasing to over 91% and tenant retention of 87% through the quarter and 75% for the year.
Overall, NOI for the year was $87.1 million while same-store NOI for the quarter was $20.8 million, down 1.3% year-over-year, but up 1.2% sequentially. I would also point out that we have less than 7% of portfolio leases expiring in 2010 and only 43% expiring over the next five years.
Our same-store revenue growth as presented on page 23 of our supplement declined 2.4% in the fourth quarter. The decline is primarily a result of two specific factors.
Now first the 13.9% decline we saw in our independent CCRC portfolio was again a result of the yield reduction of several entrance fee communities on a year-over-year basis. The second factor was the 0.3% decline we saw in our skilled nursing portfolio.
This was a result of transitioning one small portfolio to a new operator plus the restructuring of another master lease portfolio and slightly lower yields compared to last year. Excluding the impact of these operators, fourth quarter same store IL/CCRC revenue increased 1.8%.
Skilled nursing portfolio revenue increased 0.8% and our overall fourth quarter same-store revenue would increase nearly 1%. I will turn now to financial results, fourth quarter normalized FFO of $0.75 per share and normalized FAD of $0.70 per share both declined 9% versus the previous year.
As we mentioned last quarter, per share results were impacted by the nearly $1 billion in equity and debt capital rate throughout the year. I'll think more importantly fourth quarter FFO results were in line with consensus estimates and exceeded our published FFO guidance.
Next I'd like to provide some additional detail on the non-recurring items that impacted fourth quarter results. As a reminder, these items are excluded from normalized FFO and FAD.
First, we recognized $2.4 million of income from a prepayment fee associated with the pay-off of our first mortgage loan and two skilled nursing facilities. The loan repayment here reduced our overall loan portfolio by $33 million.
Next, we reported a net gain of $16.5 million on fourth quarter dispositions which included a small scale nursing portfolio, two assisted living properties and several medical office buildings. During the quarter, we terminated a lease with the hospital operator.
As part of this transaction, we recorded $8.1 million of fee income from the lease termination which was offset by an impairment of $10.3 million on the building which we continue to hold, resulting in a net loss of a little over $2 million. Overall, however this is a very positive outcome for us.
I think as a result of this transaction; $32 million of loans were repaid in full [ph]. I would point out that these items are contained in discontinued operations as this building is now held for sale at yearend.
We recorded an additional $13.1 million in impairments mainly related to five medical office buildings that were moved to help for sale during the fourth quarter. These buildings are generally not affiliated with the health system, are only 80% occupied and are fairly small in size averaging only 24,000 square feet.
At this point, we now believe that we've completed the primary repositioning of the MOB portfolio, and do not expect any more impairments near term outside of minor potential sales price adjustment as these facilities are ultimately sold. Last, we recognized the $23.1 million provision for loan losses that was primarily related to the write-off of loans to several early stage senior housing operators.
Primarily as a result of the combination of $73 million in fourth quarter loan repayments and this write-off, our overall loan portfolio declined to $427 million at yearend representing only 7% of the portfolio. Our balance of loans on a non-accrual at year ended at $67 million with a loan loss reserve balance of $5.2 million.
Additionally, I point out that the balance of the loans that we consider at risk has declined to $83 million compared to $123 million last quarter. As George discussed, we really have been focused on accelerating five to seven years of portfolio repositioning into the last several years.
I think at yearend we take a more conservative approach regarding collectibility and valuation assumptions related to certain loans despite the short-term earnings impact. And at this point, we feel that we’ve substantially taken care of the majority of problems in our loan portfolio as a result of these divisions.
I think we're pleased with our overall repositioning efforts and believe the quality of our remaining loan portfolio is incrementally stronger. To further elaborate, $256 million of our $427 million current loan portfolio are loans to three of our strongest operators who all have a significant master lease to debt as well.
The remaining $171 million generally consists of smaller loans with an average balance of approximately $5 million to $10 million each. I will now move on to our dividend.
We recently paid the 155th consecutive quarterly cash dividend for the quarter ended December 31st at $0.68 per share representing an annualized rate of $2.72. The Board of Directors also approved the 2010 quarterly cash dividend rate of $0.68 per share commencing with the May dividend.
We did have a light quarter in terms of capital activity. There were no shares issued under the equity shelf program and we received $17 million from our dividend reinvestment program to the issuance of 400,000 shares at an average gross price of $43.21.
I think our credit profile remains excellent with debt to undepreciated books cap at 35%. Interest in fixed charge coverage of 3.8 times and 3.1 times respectively, and net debt to trailing 12 month EBITDA 4.5 times.
Secured debt remained very low at only 9.8% of total assets at the end of the year. Finally a review of our 2010 guidance and assumptions.
As detailed in the earnings release, we expect to report net income available to commons stockholders in a range of $1.43 to a $1.58 per diluted share. Normalized FFO in the range of $3.10 to $3.25 per diluted share and normalized FAD in a range to $2.87 to $3.02 per diluted share.
I think given the significant capital we raised in 2009, but particularly the large equity offering completed last September, we believe that the fourth quarter of 2009 will be an inflexion point in terms of future earnings growth. I would note that our 2010 normalized FFO and FAD guidance represents 3% to 8% growth above fourth quarter annualized level.
I think we're also very optimistic about our investment opportunities this year and it included $1 billion to $1.2 billion of growth investments in our forecast. This includes $700 million to $800 million of new investments and $300 million to $400 million of funded development.
We also forecast development conversions of approximately $450 million which is heavily weighted towards the first half of the year. We expect to continue enhancing our portfolio through non-core asset sales and project approximately $300 million of dispositions this year which are primarily comprised to freestanding skilled nursing assets.
I would like to take a minute to discuss the accounting and reporting of our $668 million joint venture with Forest City Enterprises. Our total investment will be $327 million and will be listed as a new asset class under life sciences in our portfolio composition.
Our pro forma for year-end, life sciences would represent approximately 5% of our investment portfolio. For the balance sheet, there will be an increase in equity investments of $170 million which will represent our cash investment in the joint venture.
And the remaining $157 million of our investment which represents a pro rata share of the secured debt to be assumed by the joint venture will not show up on our balance sheet, but will be listed in our supplements. Regarding the income statement, we will record our share of the joint venture net income on our other income line.
And now turning to our senior housing and hospital portfolios which represent 75% of our total investment balance, we're forecasting same store NOI growth of positive 2% in 2010 excluding again the impact of the deferrals previously discussed. As a reminder roughly 70% of the leases in this portfolio are contingent on TPI growth and I do think this forecast could prove conservative to the extent TPI increases at a greater rate in 2010 as we have the right to recover loss due to the previous lack of TPI growth.
Regarding our medical office portfolio, which represents the remaining 25% of our investment balance, we're pleased with our overall performance and are very optimistic about our future prospects and the quality of our portfolio. Only 349,000 square feet or 6.7% of the portfolio is rolling over in 2010 and we are forecasting solid tenant retention of at least 75% this year.
Driven by the strong retention and leasing expectations in the existing portfolio plus the addition of the 122 million square foot Aurora portfolio which is a 100% occupied we expect to end 2010 with very strong occupancy of at least 93%. For the properties in our MOB portfolio as of December 31 we are forecasting NOI of $98 million.
I think despite the strong retention in occupancy forecast we anticipate same store NOI will decline about 1% in 2010 and primary reason for this slight decline is the lease is signed through last year and expected to be signed this year are slightly below in placed rents in light of the economy and current market conditions. Finally, we do anticipate investing $17 million in capital expenditure and tenant improvement in MOB portfolio primarily to enhance our existing buildings, increasing leasing activity and maintain desired retention levels.
Our G&A forecast is approximately $50 million for 2010. This includes $3 million in accelerated expensing of stock and options for certain officers and directors in the first quarter that’s actually a $2.6 million one-time performance based stock award.
As a result we expect to report G&A of approximately $14 million to $15 million in the first quarter and then expect the quarterly run rate of roughly $11 million to $12 million through the remainder of the year. Finally I will finish by taking a minute to discuss our capital plans for 2010 as we discuss we are projecting growth and investments of $1 billion to $1.2 billion this year and we currently anticipate financing these investment through a combination of the following.
$300 million of asset sales, $85 million of secured debt through HUD, $60 million through our dividend reinvestment plan, $117 million of assumed debt through the Aurora and capital senior living acquisitions. The pro forma assumption of a $157 million in secured debt through our joint venture with Forest City and approximately $280 million to $480 million cash from their alliance.
Based on the current $1 billion of cash in line of credit availability and only $25 million of debt maturities prior to year end 2011 we believe we are in an excellent capital position and should have sufficient liquidity to meet our current 2010 investment targets. With that, that concludes my report and operator I guess now we would like to open it up for questions please.
Operator
Thank you. (Operator Instructions).
Your first question comes from the line of Andrew Ryu of Banc of America Merrill Lynch.
Andrew Ryu - Banc of America Merrill Lynch
Just to go to same-store revenue growth of minus 2.4 I just wanted to confirm the independent living CCRC rent deferral these are these all part of what was announced last quarter or is there something new incremental and new this quarter as well.
Scott Estes
No that’s correct that’s the same operator and same amount as last quarter. There’s no change in that number.
It will take obviously another couple of quarters through that to flow through the same store results.
Andrew Ryu - Banc of America Merrill Lynch
Okay and then for the skilled nursing that you guys also reported was impacted by the transition of one portfolio to new operator. How big the investment developer is for your skilled nursing portfolio and can you give us a little more color on that?
Scott Estes
Sure in the skilled nursing portfolio the slight decline there are two items as I mentioned the portfolio transition with a pretty small portfolio is a little bit less than $20 million and it was transferred actually out of bankruptcy last July and we now have a new 15 year mastered lease at lower rent than pre-bankruptcy level. So we are happy with the new operator is in place as a part of that transition but I guess slightly lower rents.
And I think another example is the restructuring transaction. We actually were able to extend a $106 million master lease term by five years through these negotiations and provides us with an opportunity to acquire additional properties and actually wanted the property skilled nursing we did acquire in the fourth quarter is only one year old and has a very high quality mix I think its 60% in that asset so there is some positives to add to that transfer and just a slightly lower yield than last year.
Andrew Ryu - Banc of America Merrill Lynch
And then switching gears to your disposition guidance of $300 million is there a particular asset type you are looking to dispose and can you guys guide us to what the timing is, is it going to be more like the first half of 2010 or do you think it goes like the second half.
Scott Estes
Sure again $300 million is the guidance. Its virtually at least 85% of the dispositions in our assumptions, their free standing skilled nursing assets and really the timing is roughly in the middle of the year.
I think that’s probably the best assumption and generally the degree of variance in our guidance really is continued upon ultimately their ability to get financing several trying to go through the HUD process which can take a long time. So that will be the color on that.
Operator
Your next question comes from the line of (inaudible) with Morgan Stanley.
Unidentified Analyst
I was wondering if you can talk a bit more about your entries in life science and whether you see this latest acquisition as a one off or if you can see that space taking up a larger share of your portfolio in the long term.
John Thomas
This is John thanks for the question. No we see this as a strategic investment and initiative so I would not characterize it as a one off I think its about 5% of our total portfolio today and we look to grow that over time with Forest City and with our other medical center clients and new clients.
So you know it will be a measured growth and strategic growth but now we continue, we do expect to grow it.
Unidentified Analyst
And would you look to develop as well.
John Thomas
We would in the right circumstances you know a lot of our development with our hospital systems are kind of 100% or largely pre-leased facilities and we would look to again to have conservative development metrics in place as we expand and develop.
Unidentified Analyst
And in terms of the JV itself there were 10 available life science buildings why were three of them excluded from this JV.
John Thomas
Really nine potentially available for the joint venture we acquired the joint venture acquired all of the wholly owned facilities that Forest City wholly owned. They have partners in two of the facilities and assets that we would like to acquire and may acquire some future date but today we start with the seven.
Operator
Your next question comes from the line of Rich Anderson of BMO Capital Markets.
Rich Anderson - BMO Capital Markets
On Forest City so basically right now you are basically a financial partner old you have plans to sort of grow your internal life science capabilities through hirings and what not over the next few years.
John Thomas
This is John Thomas. As a part of this acquisition one important thing to us was the experience and really the history and philosophy of Forest City and particularly their life sciences management team which is based in Cambridge and frankly couldn’t have found a better fit and expertise.
So I’ve got experience we may grow experience internally and may add additional expertise inhouse but we partnered with excellent resources and team and they are dedicated team within the Forest City organization and as I mentioned based here in Cambridge so we expect to grow together with Forest City.
Rich Anderson - BMO Capital Markets
Alright but for the foreseeable future you are hanging your hat on their life science capabilities.
John Thomas
That’s right in my own experience and we expect mutual client opportunities we’ve got clients we expect to take them us to for development opportunities and acquisition opportunities.
Rich Anderson - BMO Capital Markets
Okay. How broadly was this opportunity marketed to other potential bidders?
John Thomas
We don’t know for sure but we do know Forest City was looking for a strategic partner as well and I think identified us as a through with their advisors identified us as a strategic partner. So if the joint ventures actively remains in a government structure where we are actively participating governance and continued management of the Cambridge facilities but again as I mentioned this is the future in working together with them.
Rich Anderson - BMO Capital Markets
And just another $51 million you mentioned that’s the total portfolio right?
John Thomas
That's the 7 buildings so one building will be added in…
Rich Anderson - BMO Capital Markets
But not your share I mean.
John Thomas
No that’s correct. That’s the total joint venture.
I would like to I made one slight correction in my prepared comments that half the management team at Forest City will assume [ph] for managing the joint venture is based upon the assets of the joint venture not net operating income.
Rich Anderson - BMO Capital Markets
Okay. And future growth with them would take on a similar form of joint venture type structure or would there be some sort of nuances the future transaction?
John Thomas
I think it'd be fair to say it would be the consistent structure into the joint venture, but each building each opportunity may take different forms but we would expect again keep it as simple as possible and coordinate the growth together.
Rich Anderson - BMO Capital Markets
Okay, turning to more broader question aside of that for the guidance may be Scot to you the guidance range how much of it influence was the $1 and plus investment program on guidance in other words what would your guidance range or give me some color on in the absence of this heavy dose of acquisition activity for this year.
Scott Estes
I think Rich as we built the model and drive out the guidance of the year you probably the biggest factor going into the process was the equity we raised last year really going into the year lower run rate I think really its your starting point and then we are happy to grow that run rate via the acquisitions we made early in the year. I think the other factor that its impacting numbers really is the timing of those disposition.
You know $300 million at 11% obviously is roughly $33 million of impact that they have [ph] in the first phase 0 if it happens in the last day of the year. So, we said in our guidance and I think that's kind of a picture how we started to build an ultimately what we came out with.
Rich Anderson - BMO Capital Markets
But the vast a matter or all of the acquisition activity of $700 to $800 million I think you said would be immediately accretive in the first year.
Scott Estes
Kind of our generalization obviously yes we are not assuming any incremental capital from the deals that we are talking about here, but yes that the yields they are adding immediately to earnings once they come on.
Rich Anderson - BMO Capital Markets
George when you went through your looks [ph] into 2015 what percentage of the portfolio do you think will be entrance fee and what percentage do you think will be pure hospital as opposed to the medical office component?
George Chapman
Rich I think said to the end of 2014, but entrance fees will probably be around 5% it will be my guess at this point given our growth and we’ve always thought that larger combination facilities, we probably favor rental and we just add some opportunities to do a lot of entrance phase during the last two or three years, so we’ve figure probably the combination would be much, much greater than entrance fees so we also I think entrance fees as I said before are going to be very valuable pieces of our portfolio. So I guess 4% or 5% by four or five years out.
In terms of hospitals Rich we really couldn't say. I mean within that category of course we have (inaudible), we have IRS and a lot of other types of properties and part of that answer relates to how the medical facilities evolves increasingly MOBs are larger with more medical services within them.
If that continues or if the bond markets come back to the hospitals and there is more stability in the revenue bonds but I'd say that the MOB growth would be the most significant than the hospitals but there are lot of variables. So John I don’t know if you want to comment on that further.
John Thomas
No I think that’s right and our things like global and the university medical center that were building out (inaudible) they are already projecting for the future growth I think a lot of the growth in the hospital investments will be with existing clients and going existing assets its hard to say how much that growth over time is. Our original project or investment that we developed last year with Hamas has substantial services included as (inaudible) mentioned so the hospital is really evolving to a large ambulatory care centers.
George Chapman
Rich the first one just picking up on your point John on the first (inaudible) last year you know we had a cancer center in an MOB connecting to the hospital and where one ends and the other begins is becoming increasingly interesting to watch its not unlike how senior housing has evolved where the different types account patients and different characteristics so again to answer the question we are certainly not shying away from doing a modern customer centric hospital, so especially those out in the suburbs and those that are branded by a great system that is forward-looking.
Rich Anderson - BMO Capital Markets
Right its getting blurry between the two.
George Chapman
This is something like you know.
Operator
Your next question comes from the line of Dustin Pizzo of UBS Securities.
Dustin Pizzo - UBS Securities
Jim or George was there any opportunity to own a 100% of Life Science assets.
John Thomas
This is John Dustin I think the what Forest City was looking for was a strategic partner and a partner to grow with outside of Cambridge and so there was a discussion about it but again usually the joint venture decision was the best one for us.
Dustin Pizzo - UBS Securities
Okay and then John can you also just dig a bit further into the various pieces behind the forecasted 4% to 5% NOI growth. I may have missed it but specifically what is these roll like over the next few years and where are the end placed rents relative to where you guys think the market rents are today?
John Thomas
Yeah the current market rents as it opposed to the existing facility and existing spaces in the $55 to $60 range, a lot of that is not built out. So as leases expire in the Forest City and the University Park range we expect those type of market rents to be available to the joint venture so, and again the competitive advantages leave building [ph] already built out and the lapse spaces is excellent, so tenants are looking for and trying to get into those buildings today so the near term expirations are they are not a lot of near term expirations but over the next 4 to 5 years there will be a measured amounts and market rent should be available.
Dustin Pizzo - UBS Securities
I am sorry, so the market the current market rent is $55 to $60 and where are the end placements today?
John Thomas
I think the kind of the average across the portfolio is around $40.
Dustin Pizzo - UBS Securities
And then just finally George following up on some of the bigger picture questions for Life Science I know John talked a bit about the strategy for the platform longer term and I understand the attractiveness of capitalizing on the strength of the Forest City near term, but if I were a shareholder in HCN why should I be happy today with the minority interest in the portfolio that kind of essentially be externally managed by another public company when I could at the end of the day just going back in one of the other short Life Science but its not to say any additional management based on the full portfolio of the asset [ph].
George Chapman
I think there are a lot of reasons to be very supportive of this investment. One is relates to the quality of the real estate and I really hope that a number of fund managers and analysts get a chance to visit these are the premier Life Sciences some of the premier Life Science assets in the country and it is therefore consistent with goal of having the best quality real estate assets in the sector.
Two, we have a strategy of big partners where some of the best academic medical centers in the country and clearly Life Sciences is a critical part of that. We do think that Forest City as a joint venture partner is very attractive and its not just in the Life Sciences area either.
Forest City adds a lot of development expertise in the commercial area, in the residential area. And so it’s not just expanding into health care and life sciences, it could well be that being able to have a Forest City join us in some of our ventures and in purchasing certain communities that we can really take advantage of what we have told the street is happening around the country, which is that multiple types of services are coming together in a village, in a community and we will have the ability to make some great investments together.
We really had to evaluate one another, Forest City and Health Care REIT came to the conclusion that we think a lot alike about how we treat operators and tenants. We found that to be very positive.
In terms of making sure that we could be involved in the critical decisions, we're going to be very active players with Forest City on the major decisions as well. John, you want to add any…
John Thomas
I think that again the attractiveness of these assets and these buildings and these tenants, as we mentioned, Massachusetts General and Brigham and Women's Hospital's clinical operations are on this campus and we have other academic medical centers. We believe we will be attractive to again the life science community, the quality that's in University Park, and all of them, almost all of them are large publicly traded investment grade organizations, and they are looking for access to the academic medical centers and the clinical material and physicians and vice versa.
So, we think it's a very strategic growth initiative both for ambulatory care, medical office facilities and life sciences should be very attractive for our shareholders.
George Chapman
So when you really come down to it, even though you raised the issue, the so called minority interest, we are protected from a governance standpoint and the advantages going forward far outweigh that concern in our minds.
Operator
Your next question comes from the line of Rob Mains of Morgan Keegan.
Rob Mains - Morgan Keegan
John, I want to make sure I heard this right. The $51 million that's after the management fee?
John Thomas
The $51 million is, after property management fees which are paid to -- the tenant paid the property managements. The $51 million is net of those fees and net of the ground rent payable to MIT.
It is not net of the asset management fee of 50 basis points, and again that is 50 basis points of the assets in the joint venture.
Rob Mains - Morgan Keegan
And then this is where I got the decimal point from. The Aurora deal 9.1% cash yield, haven’t heard a lot of folks talking about any kind of MOB deal for that sort of yield, is there anything different about this portfolio to get that type of yield?
John Thomas
Just persistence and growing the relationship with Aurora and with our partners Hammes in the joint venture. And you know, it’s a large portfolio, Rob, a great portion of it is in Milwaukee and attached on campus and attached to their hospitals.
Some of it is in some smaller buildings and some older buildings in the rural markets, but I think ultimately Aurora and Hammes were looking for a good partner. They needed to grow some of these facilities and we will work with them to grow these facilities over time, but other wise it's just a mutually beneficial relationship.
Rob Mains - Morgan Keegan
Right, and it's on the press release that this is a joint venture, $192 million though is your slice?
John Thomas
That's all inclusive third of [ph] the joint venture.
Rob Mains - Morgan Keegan
But the $192 million is your $192 million, the 9.1% yield will accrue to you, right?
Scott Estes
That's correct.
Rob Mains - Morgan Keegan
And just in general, when you're looking at MOB investment opportunities, I'm assuming you're not seeing a lot of 9s out there?
John Thomas
Now I think the markets has been pretty strong for one building at a time, two buildings at a time. Some of those are trading in the 8s and even premiums to that, but for portfolios of this size, there just haven’t been many opportunities and again hospital systems are looking for a relationship out of this investment of this size.
Rob, so that's, we think these kind of opportunities, the one-off trades are priced in that 8 to 8.5 range and some are getting below eight today.
George Chapman
Rob, but I think you should emphasize John's point about being a flexible partner and understanding the acute care business is telling here. We know that a lot of these facilities may need additions, may need to be reconfigured, may need new capital, and as we've talked at length, the acute care space is changing, the MOB space is changing.
So I think the ability to interface with us and we have a pretty good feeling for where the acute care space is going, makes us hopefully a very good partner for Aurora.
Rob Mains - Morgan Keegan
And then George in your initial comments, when you talked about reducing your exposure to single function buildings and particularly skilled nursing, there’s been a fair amount of speculation obviously about private equity sponsored skilled nursing that could be up for sale, some of it may be even Toledo and I just want to know kind of your appetite which preceded very high quality nursing home assets even if it is just sniff and nothing else combined with it.
George Chapman
Rob, we are very supportive of the higher end standalone skilled nursing assets. We probably prefer sniffs in combination, but I think it was just fourth quarter we bought a brand new skilled nursing facility down in Texas I believe, and so we are not adverse to it.
Now whether we would go after a whole portfolio or large portfolio, I really couldn't say. When we talk about what our plans are, and where we are going to go by 2014 about the time we think that's what's going to happen (inaudible) 2011, and the whole world changes and we have a great opportunity.
And if you are talking about a quality company and a quality set of assets such as Toledo, then it would be hard to turn down a good investment and some thing like that.
Operator
Your next question comes from the line of Omotayo Okusanya of Jefferies & Co.
Omotayo Okusanya - Jefferies & Co
Couple of quick questions back to the JV, thanks for giving us detail about expected NOI growth and on the lease roll, but to just to get to your overall, I think John you mentioned 9% to 10% IRR calculation on the deal, could you talk a little bit about assumptions you're making about exit value on the deal and also in regards to the long-term financing on it?
John Thomas
Our assumption again is a long-term role, but looking at about ten-year IRR assumption is going on or coming out cap rate about the same as the going in cap rate, that’s how our model works, but again it's really the substantial growth in NOI over that ten-year period.
Omotayo Okusanya - Jefferies & Co
What about on the funding side? Right now I think $170 million is just going to come from the line of credit, correct?
Scott Estes
That is correct. And we generally do that as a part of our overall capital plan where we think we are adequately capitalized given the aggregate investment volumes we see, but you should always expect us to consider raising capital, should we see an incremental amount of investment business from the levels there included in our guidance, which we do think is an opportunity.
Omotayo Okusanya - Jefferies & Co
So just to make sure I'm getting this right, so you’re kind of assuming the $170 million kind of space on the line of over that 10-year period to get the 9% to 10% IRR calculation?
Scott Estes
We are speaking big picture, you are talking about the specific IRR calculation. It's an unlevered IRR calculation.
Omotayo Okusanya - Jefferies & Co
Just another quick question, on the 2010 guidance, you talk about new development funding of $300 million to $400 million, but when I look in the supplement on page two, when you talk about your development funding, there is a $168 million targeted for 2010. I might assume there’s going to be more developments coming up in 2010?
Scott Estes
That is implied. You can see on the page two, Omotayo, that's right.
There is a $168 million of funding from existing projects and given the guidance it would imply another $130 million to $230 million of fundings from projects that hadn’t started at the beginning of the year. So we do expect and see some great development opportunities, but that would be a supplement to our acquisition growth which we think at this point will be more significant than additional development.
Omotayo Okusanya - Jefferies & Co
And then on the development side, it’d seem like in fourth quarter, you kind of had more conversions than I think you were expecting as of third quarter and even on the 2010 side, it seems like more conversions been moved into first quarter than what you were projecting last quarter? Could you talk a little bit about what's changing from that perspective?
Scott Estes
I think it is actually people focused on buildings. John, correct me if you feel differently, but are focused on the projects that are underway.
There is not a lot of construction going on and you're seeing full attention in projects they are getting completed on time, on budget and often early.
John Thomas
Yeah Omotayo, that's correct. We've got no shortage of contractors and subs available to work on these projects and most of them, actually all of them are moving ahead of schedule and also oddly enough because of favorable weather in the construction sites where we are actively working, so things have moved along very well in our development pipeline.
Omotayo Okusanya - Jefferies & Co
That's helpful. And then on the skilled nursing side within your portfolio, could you talk a little bit about kind of the states you're in and any concerns you may have about Medicaid reimbursement going forward, given some of the states have cut Medicaid rather significantly?
Scott Estes
I'll try to take that one. I think our skilled nursing portfolio has been quite stable.
If you look at our occupancy trend over the last really three years to five years it’s been flat. If you look over five years again, we've received a lot of benefits from the favorable reimbursement environment, five, four and three years ago such that our coverage increased from about two times up to the current 2.3 and we were watching obviously I think you are entering a period where you may see Medicare and/or Medicaid reimbursement not quite match the rate of expense growth, but given the buffer in terms of coverage we are not spending a lot of time if any at all worrying about the coverage of risk in our skilled nursing portfolio.
So we are watching like everybody else in regards to health, reform and again that's probably already there.
Omotayo Okusanya - Jefferies & Co
And then just the last question before I hop off, fourth quarter operating trends, I know you mentioned that you thought they were stabilizing or getting better across many property types, can you give us a little bit more detail about what you are seeing with regards to improvement occupancies or rental rate increases?
Scott Estes
Sure. The comment was really in senior housing, so it would be on skilled nursing and generally somewhere in this 20 to 50 basis improvement range for all three, and recall [ph] 0 to 51 was between 0 and 30 was our preliminary guess, so it’s basically flat up maybe half a percent through the first couple of months of what we received so far in the fourth quarter.
And coverage would be that flat.
Omotayo Okusanya - Jefferies & Co
Are you seeing further improvement into January/February from the fourth quarter?
Scott Estes
We don't have that info, sorry (inaudible) things we received from our operators today, but if anything, one or two I think talked about would be our division.
Operator
Your next question comes from the line of Todd Stender of Wells Fargo Securities.
Todd Stender - Wells Fargo Securities
For your disposition guidance, how much of that is related tenant purchase options? I think it going to be one-off sales to third parties are the tenants…
Scott Estes
There are skilled nursing operators, Todd, and I think a couple of them are purchase options. The key really is getting the financing on the other end is people would like to evaluate repurchasing the buildings that's generally been in our portfolio for a while and hence the free standing field nursing are generally fine with them refinancing (inaudible) if they are able to get it.
So a couple of these I would say in general in size, there are two that are approximately $80 million to $100 million, that are skilled nursing portfolios that are contingent in timing and going through the high process in one case I know in particular. So, and then the rest of the other $100 million would generally be smaller pieces of assets.
Todd Stender - Wells Fargo Securities
Are you willing to provide seller financing on these to just facilitate the sales?
George Chapman
Not on these portfolios.
Todd Stender - Wells Fargo Securities
Okay. And just with your guidance, do you have any debt repurchase activity included in the guidance?
George Chapman
No.
Operator
(Operator Instructions). Your next question comes from the line of Jerry Doctrow of Stifel Nicolaus.
Dan Bernstein - Stifel Nicolaus
Hi. This is actually Dan Bernstein filling in for Jerry.
I guess I had a question maybe everybody spoken about the JV, so I want to switch topics to the dividend policy and you may have addressed this earlier. I actually jumped on the call late.
The dividend was kept flat with the current quarter and I guess we're trying to reconcile our thoughts with you're very positive about the acquisitions and stabilizations of some of the portfolios and development, but you didn't raise the dividend. So we want try to get some thoughts on your management board thoughts on why the dividend was kept flat and what that says about how you feel about the company?
George Chapman
I think that we are a little conservative in that regard. We knew we're going to have a pretty good year in terms of volume of investments, but also look at coverage, FFO and Fab and thought for now at least, we'd see how the year played out.
I suppose even within this year that we can revaluate that record. I think that was a consensus view of the board and management it might just reflect our basic financial conservatism and we are certainly very optimistic about our ability to do excellent acquisitions and to a lesser degree really quality development.
You shouldn’t read any concerns into it, it's just perhaps our approach doing business.
Dan Bernstein - Stifel Nicolaus
And historically, you've been in the low 80% I guess FFO payout ratio. Is that where you'd like to be going forward?
It seems like you're higher than that now, and does that play part in the decision?
George Chapman
We had historically been in the low 80s as we see the market place evolve. We're going to have to evaluate exactly where we want to be.
It's been a great change in the leverage percentages with a wide array of feelings about low leverage versus running at 45% or even as high as 50%. So, we'd like to check out all the, and look at it and come to a conclusion over the next quarter or two as to where we want to go and therefore, re-evaluate whether or not we should increase our dividend.
Dan Bernstein - Stifel Nicolaus
That seems pretty reasonable to me. And the other question I had was on the development.
And again you may have spoken about this earlier, you didn't list any development that was expected to come online in the out year spoke [ph] out 2012 to 2014. Are you strategically thinking about pulling back on development some versus acquisitions?
It seems like that in some of your comments, but I might have missed the beginning where you talked about the overall strategy for development?
George Chapman
I believe that development is a critical part of our program going forward. We've talked about the changes in the acute care space, even at medical office buildings are changing dramatically, larger, more customer centric, more medical services, more one stop shop.
We've talked about senior housing projects getting larger and better and more common space. So, it's going to be have to a critical part of anybody's portfolio if they are going to continue to have the most modern portfolio, but I think to some degree, the economics times allowed our development to become a higher percentage perhaps than we would have liked during the last year or two because we are a quarter, a third, a halfway through development, and you don't stop good developments.
So, I think we've always had the approach and we maintain that development should be a key part of our future. We're going to continue doing that where we begun a new cancer center down in Florida.
We're doing another high end medical office building out in California and we have others on the drawing boards, but I think that as Scott pointed out we have some great acquisitions and to the extent that we can focus on acquisitions, but not be concerned about proceeding with a great state-of-the-art development, so that's our approach to business.
Operator
And will now turn the conference back over to Mr. Chapman for any closing remarks.
George Chapman
Thanks very much. I'd just like to express our appreciation to everybody who participated today and Scott and Mike and team will be available for any follow-up questions.
Thank you.
Operator
Thank you again for participating in today's conference call. You may now disconnect.