Healthpeak Properties Inc (PEAK) 2002 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Health Care Property Investors Fourth Quarter and Year End 2002 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Mr. Kenneth Roath. Please go ahead, sir.

Thank you very much, and good morning to everyone. We are pleased to be here today to discuss our year-end results for 2002. We are pleased with the results; we met the street consensus estimate. We also met the range of guidance that was established more than a year ago, I believe as far back as October 2001, although that was the low end of the range. We also have continued our record in the company of never having a down year in the 17-year history of the company.

We have continued to meet our objectives, in spite of a difficult operating environment, particularly in the skilled nursing facility area. Funds for our operation for the year ended December 31, 2002, was $199m or $3.43 a share. That is up from $3.32 in the prior year.

Also during the quarter, we announced a plan of succession. I think that is one of the most important issues that has taken place in the company. I'm here to tell you that the plan is working out very successfully. Jay Flaherty has come on board as President and Chief Operating Officer of the Company, and he has immediately gotten in to all aspects of the business of the company. He's well received within the company and he's doing a great job. In few minutes, Jay will make some comments.

During the quarter, we also had an announcement of the difficulties with one of our skilled nursing facility operators, Centennial, who had twenty leases with the company. Sometime late in October, they announced that they would have difficulty making rent payments in the future. We had worked with this lessee for quite some time; they had gotten behind in rent and then caught up, and got behind, and caught up, and so it went on for quite some time.

But we collected a lot of rent, but then ultimately they came to us and indicated that they could not pay rent. We took appropriate action to protect the rights of the company, and in the announcement that was made, we indicated that there would a diminution of about $5 million dollars in revenue, which was about half of the revenue off of those properties, and that's in releasing them either to them or to other operators.

It appears at the present time that we're on target for that, and we're working diligently towards a successful completion of this transaction, and the properties are likely to be leased to several different operators at conclusion. Longer term, we do expect that the rents will rise on these properties well above the initial re-set of the rents.

Part of this was brought about by a difficult operating environment for skilled nursing facilities. As many of you may know, the Medicare Cliff funding ceased on October 1st with a 9 percent reduction, and that has caused a lot of concern within the skilled nursing industry. Jim Reynolds, who is here with us today, will comment more specifically on this issues and other operating issues.

During the quarter, we also renegotiated our bank line and increased the size of the line by just about $100 million dollars. It was very successfully executed on our behalf, led by Bank of New York Capital Market, with principal agents participating in the transaction of Bank of America, Wachovia, and Wells Fargo. We're very appreciative of that line of credit; it is a multi-year line of credit.

In terms of acquisitions for the year, we sent out a release recently that we in fact met our acquisition activity for the year, for the fourth quarter. We closed on $86m in new investments, bringing the year to date total to $417m. The company has also, at this point in time, signed commitments for about another $140m worth of transactions that are expected to close sometime in 2003. I will remind you that there is always the risk that some of the commitments that have been executed may not actually conclude as envisioned at the time.

The pipeline of investment opportunities remains robust. We currently have under review something in the neighborhood of about $400 to $450m in investments. And we reviewed, during 2002, something in the magnitude of about $7.7b worth of transactions. Now, of that, a lot of those are unacceptable transactions to us that do come in and we look at. But in excess of $2b worth of properties were properties that we had some serious interest in. Of that, about 20 percent of those that we had interest in resulted in us closing transactions with various parties, so that's the $417m that I referred to. And that was 25 different transactions. And we do have commitments, as I said, of about $140m with another 10 operators.

It was a very successful year for acquisitions. We are looking forward to another very good year of acquisitions coming up in 2003, and at this point, I'd like to, first of all, ask Jay Flaherty to comment on the business opportunity prospects and so forth.

Thank you, Ken. I think I would describe how we're spending a lot of our time in the last month or so as being focused with respect to the nursing home sector. I think we're obviously - we've had the Centennial experience; we're looking forward to having our daily war room sessions conclude here, hopefully by the end of the first quarter, and having that process behind us. We are spending a fair amount of time visiting directly with our operators. Jim Reynolds will comment in a few minutes with respect to some of the likely developments as it relates to government reimbursement, in terms of milestones that are likely to unfold later this year.

But we are spending an awful lot of time focused on that sector, trying to understand exactly what's going on there, what the drivers are going to be, are the drivers economically changing, and what opportunities come out of that for the company. We had some additional disclosure as it relates to Sun Health Care, another one of our operators – Jim will comment on that as well.

So that's, I think, probably been the focus of a lot of our time in recent weeks. With respect to looking out for the balance of '03, I think we want to remain absolutely committed to two or three tenets that have shaped the company since it went public in 1985 – the first, and maybe the most important of which, is diversification.

If you look at our portfolio right now, we're spread across four significant sectors: skilled nursing facilities, representing 25 percent of our revenues; queue care hospitals, representing 24 percent; assisted living, representing 14 percent of our revenues, and the medical office building portfolio, representing about 20 percent. We very much like that diversification. You should expect diversification of that magnitude to continue. We think it, from a standpoint of managing the company, is very important; it creates opportunities for us, given the size we have in those individual sectors, that we are quite excited about.

The second kind of key thing that we're going to remain absolutely committed to here, going forward, is one of being opportunistic. If you think back on the perspective history of the company, I think there's a number of transactions -- there was the Beverly transaction, back in 1989, the acquisition of American Health Properties in 1999, and even last summer's investment in ARC, American Retirement Corp, that absolutely fit the mode of the company sensing an opportunity and moving quickly to take advantage of it. And I think we want to continue to operate in that manner, going forward.

The third kind of foundation of how we're looking at business prospects is maintaining a very, very strong balance sheet. This does a number of things to us, for us. Obviously, it provides us with low-cost capital; it provides us with continued access to the capital market. The company evidenced that on a number of occasions last year, when it was the debt offering; in the late spring, the revised and upsized bank line of credit that was finalized in the most recently completed quarter. Again, our investment program continues to be very, very successful, and that continues to de-lever the company. So maintaining that balance sheet and all the good things that come with it are going to remain one of the top priorities of the company.

I'll turn it over to Jim now. The financing market obviously is quite good, which provides us with the ability to move, and maybe I'll have Jim comment on some of those issues.

Thank you, Jay. The first thing on my list is FFO guidance for the year 2003. Ken indicated that we earned $3.43 in 2002 on a per-share basis. The range that we're indicating for 2003 here is $3.51 to $3.59, up 25 percent on the low end; up 5 percent on the high end of that range. This is down a little bit from the guidance that we gave just a quarter ago, because of the issues that we've experienced with the long-term care segment of our business, which Ken has talked about, and I'll talk about a little bit more.

To achieve those objectives in FFO for 2003, we will need another good acquisition program, in part because we expect flat to slightly negative internal growth, because of those long-term care issues, primarily. And on the subject of the good financing environment, just a few indicators.

Our bank line is currently at $260m outstanding, out of a total of $490m available, at an interest rate of 2.2 percent today. We also have the opportunity to refinance notes payable aggregating $43 million during the year 2003. That is outstanding to 7.4 percent, so we should be able to achieve approximately a 100 basis point improvement on those funds.

As we indicated in the press release, we've raised $84m in our grip dividend reinvestment program, in terms of new common stock equity over the last twelve months, at a price of $39.50 per share, and the current run rate on that program is about $100m per year.

Turning to the nursing home long-term care segment, we've already made some comments on it. Our discussion, I think, in the earnings release is fairly complete. We have, I think, given you a head's up on Sun Health Care. We have had a couple of discussions with them at this point. I think they will be asking for rent concession in the future. I do want to also let you know that we have, in our budgeting process, allowed for additional problems to occur during the year, and we've already taken into consideration the Centennial and Sun issues in our estimates.

Turning to the Medicaid, Cliff and other Medicare issues, not too many people have talked about the Cliff II cuts that are currently in place for October '03. We think you should follow the progress on those. When and if those do come, they're likely to be different than the across-the-board cuts that took place last October. These cuts will move differently through the different rate categories. There will be more money for more acuity and less money for less acuity. On the subject of therapy caps within Medicare, I don't have any estimate for what that might be, but the government has put off those limitations from January until July of this year. And what the government really needs is a tracking system by patient to implement that, and they don't have that system yet, so it may be further delayed; we don't know.

In terms of Medicaid reimbursement for the nursing homes, we have recently completed an informal survey on our own behalf, recalling approximately fourteen states that are most important to us, and seven of those states indicated that they are planning overall cuts in the Medicaid rates, which is not a good thing for the nursing home industry. We also indicated in our earnings release, that if you take the Medicare Cliff I funding that our coverages would drop a couple notches in that portfolio on a pro forma basis.

Turning to assisted living, we had a nice improvement in the cash flow coverage in that portfolio this quarter. We were very happy to see that. We think the other positive signs that you see in the sector are the competition for the ARB portfolio and also a number of improved stock prices in the sector.

Turning to some financial matters and some accounting matters, you'll notice that we had a significant increase in GNA expenses for the year 2002 versus 2001. About half of that related to payroll costs, including the management succession plan, including reinstatement of bonuses that the executives did not get a year ago because of our flat FFO performance. And from an increasing employee count, which has gone from 42 employees to 46. The other half of the increase is primarily related to troubled properties, operating expenses on those properties, including property taxes, and bad debts related to a number of operators. We expect that that number will come down in 2003 and those expectations are cranked into our estimates.

On the subject of American Retirement and how we are recording our loan related to American Retirement, as you may know from previous releases, the pay rate is 9 percent. We are recording a 4 percent accrual on top of that for a total of 13 percent. In doing so, we are looking at the underlying value of the properties and the improvement in the performance of those properties, even since we purchased them, and the underlying equity that our operator has in those properties. We encourage each of you who are interested in that particular transaction to review the public releases from American Retirement, which should allow you to track well what is happening with that public company.

And with that, I'll turn it back to Ken.

Thank you very much, Jim, and thank you, Jay. At this point in time, I'd like to have our General Counsel and Senior Vice President, Ed Henning, read the statement that one normally reads accompanying the press conference.

Edward J. Henning, Esq.: Thanks, Ken. Some of the statements made during this conference call contain forward-looking statements, subject to risks and uncertainties which are described from time to time in press releases and SEC reports filed by the company. Forward-looking statements reflect the company's good faith belief and best judgment based upon current information, but they are not guarantees of future performance. Projections of earnings and FFO may not be updated until the next announcement of earnings, and events prior to the next announcement could render the expectations stale. I will now turn the call back over to Ken.

Thank you, Ed. There is one last item. During the quarter, the company increased the dividend to 83 cents. It was the 68th consecutive quarterly dividend increase paid by the company – that's increase since inception. And I want to remind all of you that the Board of Directors of the company does meet at its regular scheduled meeting on Monday of next week, and at that time, the Board of Directors will address the dividend.

At this point, Operator, we would like to open up the conference call for questions.

Thank you, sir. If you would like to ask a question on today's call, you may do so by pressing *, 1 on your touchtone telephone. Again, that is *,1 to ask a question, and if you're on the speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is *, 1 to ask a question. We'll pause a moment to assemble our roster.

We'll take our first question from Patrick [phonetic] Baytag with Invesco.

Ken and Jim, just a question. You mentioned already that gross for 2003 would be primarily through acquisitions, but I didn't hear a number that you're targeting for the year.

We have decided that it would be more appropriate if we just give you the guidance. We will do what is necessary for us to achieve the guidance that we're putting out on the street. I think people pay too much attention to that number, and as I say, we will do whatever we think is necessary and appropriate for the company, operating in the manner in which we have, on a conservative basis to achieve the forecast numbers that we put out.

Patrick, the only thing I would add to that is the success of last year's program will have a significant impact, of course, on the 2003 numbers.

Certainly. That's understandable. One other question, especially in the S&F arena, with regards to operators. Would you guys hazard a guess? Are we at a bottom here? Are more surprises out there? Or we just don't know yet?

Patrick, this is Ken. I don't know that anybody can tell you that. We've been at this for a long, long time. The company has, over the last two or three years, gone through a period where there have been fairly significant lease roll-downs with respect to skilled nursing facilities. A lot of that comes to pass by the fact that's at these are very long-term leases. But I remind you, even with Centennial, we had some of those properties for 14, 15, 16 years. We were also receiving rents on those properties that were approaching as much as 15 percent on some of them.

So we had done extremely well holding those properties for a long period of time. As you and others may know, the dynamics within the skilled nursing home industry have changed over the long haul, and reimbursement is, at the present time – I almost hesitate to say 'inadequate', but I guess that's maybe what it is. And something has to be done to restore some of the cuts that have been made with these facilities; otherwise, we might be looking at problems.

Now, every operator is different. Some of the properties that we have talked about where we're re-setting rents; some of the problems there can be attributable to maybe management focused on other aspects of the business and not focused on specific properties when they should be. There's a lot of things that go into it. So it isn't all just reimbursement.

We fortunately, within the company have a very substantial database. Whenever a problem does occur, such as with Centennial, we are capable of going into our database and pulling up properties within a specific state to compare operations with other operators with those - you know, some of whom may be getting intro trouble. And we can analyze what the situation is. And what the prospects for improvement are.

With Centennial, I think there's good prospects for improvement in operations over time. Do I think that the rents will get back to where they once were? No, because the dynamics within nursing homes have changed over time. But I would expect that it might approach back up to 75 percent or so, maybe 80 percent, of what it once was. Is that a long way of answering your question?

Sure. At that level, whoever is going to operate these properties, they can be profitable?

Yes. Well, at resetting the rent at half, there are several people, a number of people, who are interested in taking over the properties. So we think that the guidance that we've given on those properties we're comfortable with.

Okay. And then you did mention monitoring and stuff like that, so you do have a system in place to monitor operators, especially when they do start to get in trouble? Is that correct?

Yes, but Patrick, you also have to understand that this business is no different than being an owner of a shopping mall in which you have a store that you lease to a book vendor. And you can't go in and tell him how to sell his books. We can't go in and tell them how to run their nursing home. Lessees have quiet title to the property. They're entitled to run it. And unfortunately, sometimes they don't run it as well as you would like. Yes, you can do certain things; you can talk to them and encourage them and point out things to them. And we do that without disclosing competitive information from other operators, which we would not do. So yes, we do monitor.

Okay. Thank you very much.

Okay. We'll take our next question from Doug Simpson with Merrill Lynch.

Thanks. Good morning, everyone. I was just wondering could you give us a little bit more color on your expectations for investment activity in ’03? I know you don’t want to give an aggregate amount, but could you maybe talk about the mix of asset types that you would expect to look at and your thoughts on yields and then, maybe, just also touch on sources of financing? Looks to us like you have sufficient debt capacity, especially with the DRIP plan, $100m contribution there, but just wanted to see what your thoughts were on that as well.

Yes, Doug, Jim Reynolds. On the subject of financing, which I think maybe is the easiest part, the DRIP is doing a great job on the equity side. With falling rates as low as they are, I think we’d like to take advantage of that. It may be that a $200m debt issuance is maybe all we need for the current year. I know long-term, we look at, basically, a $1.00 of equity and $1.00 of debt on a very rough basis, to finance our asset growth.

On the subject of what property types it might be, I think Jay already said that we’d like to keep the diversification where it is. So, we’d like to be investing in all of the sectors that we’re currently in and hopefully, on a reasonably pro rata basis, to where we’re at.

Doug, this is Ken. I did mention earlier that we do have commitments of about $140m and again, I want to caution, some of those commitments could go away. You never know until -- the real estate deal is not closed until it’s closed. Isn’t that what the yogi says?

Yeah. .

But you know we’re looking for a very good acquisition program in the coming year.

Maybe just to push on one area a little bit, in the assisted living area. In your disclosure it says your investment per bed’s about $56,000 on a per unit basis in that area. And I’d just be curious to see how would you characterize that $56,000 in terms of what’s your high, what’s your low currently? And then, as you’re looking at new deals, do you have a sense for what the range out there, that people are asking, on a per bed or per unit basis?

Doug, it’s Jim again. I think it’s all over the map, depending on the demographics and the income in the state. We may be going up to $70,000, 75,000, or $80,000 a unit. We recently had an excellent opportunity to get in at a very low cost onto some excellent properties. So, I think, depending on the facility and where it’s at and the construction and a lot of different factors, it can be you can get a lot of different answers.

Yeah and you know, Doug, it ranges, like, Mississippi to Massachusetts, you know? Or it can go from $50,00 to $100,000 easily.

Yeah, we just did the transaction at $63,000 a unit for really excellent real estate.

Okay, great. Well, thank you.

We’ll take out next question from Robert Belzer with Prudential Securities.

Hello.

Hello.

Hi Robert.

I have a few questions today. Can you indicate which investments you took the impairment charge on in the quarter?

Yeah, the impairment charge related to vacant clinic buildings and some vacant nursing homes. The nursing homes we’ve finally gotten off of dead center with the State of Oklahoma and have been able to move forward with our plan there. Which was, basically, to move patients out of some buildings and into the ones that we wanted to keep long-term and so that’s part of the adjustment there and the other part is the physician clinics.

Jim, are you finding any Capex requirement for the vacant nursing homes, when you finally can release them?

Yes, but I’d say it’s uneven. In some cases, there’s none. In other cases there may be $250-300,000 a unit type of number, but it’s not -- and of course if you’re renewing with an existing customer, there’s nothing going on there.

Okay. Moving on to Centennial, you indicated in your press release that they may keep nine facilities. Have they affirmed these leases or do you expect them to affirm these leases?

Well, they can’t affirm them, because we’ve terminated them to protect our own interests, but we are negotiating new leases with them. Our view there is that we’re going to have a stronger tenant and that David Wilson, who is the new president there, has really only had a year to make improvements. And we think it’s a good sign when you see some of the operations improving, even as they’re going into bankruptcy. So, it also makes for an easier transition of the remaining facilities to third parties when you’re working with the existing customer, so we think we’re doing the right thing and time will tell.

In your guidance, Jim, do you have any transitional risk in the number you put out for a roll down guidance from Centennial?

I think there’s always some risk, but we don’t -- we expect to do pretty well, because of the involvement of Centennial in the transition and keeping some of the buildings, so I think that risk has been minimized.

Okay, then moving on just to aggregate Medicaid rates, you mentioned that seven of your fourteen primary stakes may actually cut rates. What do expect in aggregate for 2003, as far as rates going up or down?

Yeah, I think it’s too early. Those, I mean, for instance California is talking about a big -- but it’s only talk at this point -- it’s a big decrease and other states are just almost breakeven. So I think it’s too early to really estimate what that number might be.

Robert, many of those adjustments will be the latter half of 2003 and into 2004, too.

So you expect that the rates are currently fixed for 2003? Is that a correct assumption?

I think that’s generally the case.

I just think we get a better indication, mid-year, where these things are going than we have right now.

Okay, Ken, you mentioned that in California they’re looking at a cut. Do you have percentage cut they may be looking at?

We have heard in the neighborhood of 10%.

Ten percent Medicaid cut?

Uh-huh.

Is that an aggregate or just for nursing home operators?

I think that’s an aggregate cut for Medicaid.

Edward J. Henning, Esq.: Yeah that’s aggregate, too. Yes, its Gray Davis has proposed it effective, I want to say, April.

I think [splitting] is what it is.

Okay, then moving on to what you --

By they way, we do not have a lot of skilled nursing facilities in the State of California, proportionately. We have a lot of other -- we have a lot of dollars invested in California, because we have some large hospitals and we have some medical office buildings and so forth. I mean, we do have a number of nursing homes, but not as much as the dollars would indicate.

Okay, then moving on to your investment program, do you expect investment yields to hold up in 2003?

You know that’s also a function of what interest rates will do. If interest rates stay where they are, I think we will do exceedingly well. If interest rates start to rise, it’ll put a little pressure on it, but I think we’ll do fine, at least at the present time. I mean, we all sit and watch the10-year Treasury all the time to find out what our future is.

Okay, then one last question regarding your guidance. Do you have -- have you factored an equity issue into your guidance?

Yes, well, of course there’s the --

The DRIP.

The DRIP and then I guess, at the end of the year, there might be something of more magnitude, if we need it at that point in time.

Okay great. That’s all my questions today.

Thanks, Robert.

We’ll take our next question from Rob Stevenson with Morgan Stanley.

Good afternoon, guys.

Hello, Rob.

Rob.

Jim, you talked before that you weren't going to give acquisition guidance for the year anymore. What are you targeting, in terms of the FFO attribution, though in ’03 from ’03 acquisitions, is it material?

Actually, we -- they want volume, price, or the net results and I think we’re first backwards.

I don’t care how much you guys acquire. You guys could acquire $10m if it contributes $0.10 or $0.12 to earnings.

Right.

But is it --.

Edward J. Henning, Esq.: I think Jim say, though, when he gave some guidance and I think he did make a comment with respect to growth or lack thereof, from the existing portfolio.

Okay. Because, I mean, at the current run rate, it would sort of put you, basically, more or less, in -- I mean, if you take the fourth quarter FFO number, it would put you sort of right there at this number. And then, sort of deducting out for a roll down from the internal would mean that, I mean, if my number are correct, somewhere in the neighborhood of probably $0.04 or $0.05 or whatever for the year?

Yeah. I don’t have -- I don’t know that math exactly, Rob.

Okay. Okay, other question, Ken, is there anybody other than Centennial and Sun on your watch list? Is there somebody out that you guys are keeping an eye on like a hawk for fear that in the next quarter or so that you could be faced with a similar Centennial issue?

We’ve culled through the nursing home portfolio in particular, looking for someone else. We don’t, I mean, there may be people with a 1-facility or a 2-facility issue, but in terms of a portfolio problem, we don’t currently see another one.

Okay.

We are cautious that the reimbursement environment is negative. That it may cause other problems that we’re not aware of. You just don’t know. You can’t project.

Edward J. Henning, Esq.: Well, we are, you should understand, spending an enormous amount of our time visiting directly, in person, with our existing operators in this space, to try to stay very much on top of what all is going on with respect to their individual business models.

Okay. In something of that vein, though, are you seeing any sort of real deterioration in pricing or additional availability of people putting assets on the market? I mean, is the reimbursement materially effecting the acquisition market for you guys?

Well, I don’t know that it’s effecting, I mean, because we’re seeing a lot of product. But certainly we are unwilling to by properties unless you factor in a full adjustment for CLF funding reductions and so, the pricing is changing on a lot of the acquisitions.

Okay and looking at the DRIP, you guys did an average price of $39.54 for the year. I mean, you guys you had, fortunately, throughout ’02 your stock price hadn’t really been down except for early in the year and very late, most recently at the end of the year, wasn’t really in the sort of $37.00-$38.00 range. It was higher. I mean, is there a price below which the Board would be highly likely to suspend the DRIP?

Rob, that is a question that Board of Directors will consider and we have the options to terminate the program if we so choose and we think it’s wise for the Company and the Board of Directors will carefully make that decision. Right now, we think it’s still a very good program for the Company and it’s a very good support for our acquisition program.

Okay and last question. Ken, at the tail end of your comments, you said that the Board will be addressing the dividend at it’s meeting next week. Is that comment any different than what you would be saying at the end of the third quarter or the second quarter or the first quarter conference call from last year?

Absolutely not. That’s when the Board reviews it. The Board makes the decision on the dividend. If you look back at the prior quarters, we have this announcement and shortly thereafter there’s a Board meeting. And the Board, when we have had an opportunity to present the full financial statements to the Board of Directors and review the financial statements with them, they then make a careful decision on what they should do with the dividends.

Okay. So, we shouldn’t be reading anything out of the fact that you just threw that in as the last sort of comment before the Q&A?

No, you shouldn’t.

Okay. Thanks, guys.

Thank you.

We’ll take our next question from Howard Capek with UBS Warburg.

Hi, Howard Capek. Hi, good afternoon, Jay, welcome, congratulations. Two questions, one of Sun, looking at the portfolio. Win concessions, is this more a function of the CLF rates or is it something as they’ve finally culled through the portfolio and gotten their hands on numbers, making an adjustment back in line with market rents? That is the first one and the second question is on the Medicaid and on the state issues. Is this again, more beneficiary-design changes or is this hard and fast SNF payment reductions, that the seven of fourteen states mentioned? I think somebody asked it differently and I didn’t quite understand the answer. Thank you.

Well, with respect to our survey, it went to the SNF rate reductions directly, not overall budget considerations for Medicaid.

Okay.

With respect to Sun, I think there’s probably a number of issues related to that company and I don’t know that I really want to go into it. I do think that they may be asking for a rent concession from us for a number of reasons, but beyond that, I don’t think we should talk specifically about their particular situation.

Is it something you’d concede to or is it in the negotiating process and they asked for some and some you hold fast on?

Edward J. Henning, Esq.: They’re current, though.

There is a negotiating process, but they are current right now.

Okay and so that negotiating price is based on -- I don’t understand. I mean, are coverage ratios dipping so low that they can contractually renegotiate with you or --?

Yes. The coverage ratios on a few of the facilities are underwater and that’s how they would be able to renegotiate. Onzan [ph] is -- there’re a number of different issues that can cause that and I don’t know that it makes a lot of sense to try to get into which one versus another.

Okay and so net-net, when you look at same store of being flat to down or internal growth being flat to down, these rent concessions are included in that guidance?

Yes they are.

Okay great. Thanks a lot, guys.

We’ll take our next question from Dave [Aubechon] [ph] with A.G. Edwards.

Yeah, Dave [Aubechon], A.G. Edwards. As it relates to the ARC loan and trying to calculate an FAD or adjusted FFO, what is -- are we correct to just get the difference by the initial cash yield and the 13% you’re charging or you’re booking as income on the statement?

Yes that’s correct. It ought to be about $1.2m for the fourth quarter of accrued interest over and above paid.

Okay. But that was an adjustment for 2002 only, right, or for just all of 2002?

Dave, only for the fourth quarter of 2002.

So, that would be the appropriate run rate going forward, then?

Well, unless the operations improve significantly or go south.

And so, are you looking at that on a quarterly basis or how are we to approach this?

We’re looking at it quarterly, because we get the updates from the Company, in terms of it’s public information, comes quarterly and that’s a reasonable period of time to update on.

Okay and then on the Utah hospital, did you, in terms of the straight line of rent that you were booking there, did you take all of that down in the fourth quarter when you renegotiated the lease?

Yeah, the overall effect is a full year, but we’ve recorded it for two quarters in 2002 and the additional two quarters will hit in 2003.

Okay. You gave, in the supplemental information that you provided you have the absolute dollar amount on the same store, in terms of the revenue decline for the Triple Net portfolio and the managed properties. Do you have what that is on a percentage basis?

Well, yeah, I guess you just take the -- I mean, it’s basically flat over whatever revenues are. I mean, it’s not much of an effect.

So it’s not material?

Right.

Okay. You talked about the dividend briefly, but what is your opinion on the current dividend policy, I guess, that backs up, obviously, of four fundamentals and being fairly close or even over in some quarters on an FAD basis?

The Board of Directors will consider the dividend on Monday of next week. We are very well aware of what the payout ratio is and that’s one thing that will be considered at that point in time. We have said exactly those same things on previous quarters.

Okay. Thanks.

Okay.

Once again, if you would like to ask a question on today’s call, you may do so by pressing star-1 on your touch-tone telephone. Again, that is star-1 to ask a question. We’ll take our next question from Scott [O’Shay] [ph] with Deutsche Bank.

Scott [O’Shay]: Good afternoon, I guess, your time. A question on the tenant percentage rent? What was the dollar amount that you received in 2002 that would be a base to look at the potential $500,000 diminution this year?

I don’t think we disclosed that Scott.

Scott [O’Shay]: Okay. I also had a question, just looking at the ARC and the Emeritus deals this year, which are more of a structured loan type of relationship. What’s the depth of that market? Should we be looking for more deals like that in ’03? Are there things in the pipeline that look like that type of deal?

Scott, this is Ken Roath. Those are opportunities that the Company and like Jay was suggesting, we manage the Company and manage the balance sheet and have strong financial positions to be able to take advantage of opportunities such as that. And it goes back, like Jay even suggested, all the way back to the Beverly transaction years ago. You know, being prepared, being opportunistic, and going after transactions that we feel are a good and valid risk to be taking, in relationship to the returns that you’re getting. So, that will not be the norm but they will also not be overlooked when those opportunities come.

One of the advantages that we have in this Company today over our competitors is our size. We’re more than twice the size of our nearest competitor and it does allow us, with the very diversified portfolio we have, to go out and reach out and do certain transactions like that when we believe that it is a justifiable risk for the Company and for the portfolio.

Scott [O’Shay]: Okay great. I had a question just on reserves and I was wondering whether you had considered just taking a regular quarterly reserve against the loan and lease portfolio, given it’s size and the fact that there’s been some roll downs and reductions over time. That maybe an ongoing reserve might be appropriate at this point.

Well, we look at - if you’re talking about receivables - we look at those quarterly and as I indicated in my comment, we’ve taken some significant bad debt reserves during the year. We’ve also taken some impairment reserves that we also discussed, so it’s something that we are looking at on a quarterly basis. We’re more attuned to looking at specific issues rather than some kind of an overall general reserve, because we think that’s the right accounting.

Scott [O’Shay]: Okay. It was noted in the press release that the coverage ratios of the SNF portfolio, I guess the pro forma coverage would be roughly 1:2 times. If it goes to that level and your operators are looking at additional Capex charges as kind of an ongoing cost to them, are you potentially looking at a number of operators close to one at that point? Or, I guess the other way of putting it is just kind of what’s the distribution around the 1:2?

Well, I think it says on a net basis, you’re at roughly market rents and that’s also a pro forma calculation. For instance, the fact that we’re going to have lower rents on Centennial is going to improve that ratio.

Scott [O’Shay]: Okay.

So and I think I’ve indicated that if you get outside the larger portfolios, there may be one or two property portfolios that are operating below 1:1. We don’t think we have big portfolio, but it’s close to the edge.

Scott [O’Shay]: Okay great. That’s it, thank you.

Thank you, Scott.

Mr. Roath, there appears to be no further questions at this time, sir.

Well then, thank you very much, everybody, for coming in to the conference call on our earnings. And again, I want to say that we’re expecting a very good year in 2003 and we will. The management here is working very diligently to make it a successful year. Thank you very much.

This does conclude today’s conference call. At this time, you may disconnect.