Healthpeak Properties Inc (PEAK) 2003 Q2 法說會逐字稿

Good day, everyone. Welcome to today's Health Care Property Investors second quarter 2003 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Chief Executive Officer, Mr. Jay Flaherty. Please go ahead, sir.

Thank you, operator. Good morning to our friends in the Midwest, and the East coast good afternoon, everyone. To the second quarter earnings conference call for Health Care Property investors. Speaking today are the Executive Vice President and Chief Financial Officer, Jim Reynolds. Senior Vice President of Strategic Development and Treasurer Talya Nevo-Hacohen. And Senior Vice President General Counsel Ed Henning. At this time, I'll ask Mr. Henning to read a statement concerning financial disclosure.

Thanks, Jay. Good morning and good afternoon. Some of the statements made during this conference call will 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'll turn the meeting back over to Jay.

Thank you, Ed. Our agenda for the call includes comments from myself in three areas. One, a review of the operating environment during the quarter. Two, an update on certain organizational changes. And, three, some perspective on the second half of the year. Talya will then review our recently announced $600 million joint venture with the General Electric Corporation and provide a summary of our recent capital market activity. Jim will then take you through the financial performance of the company for the quarter as well as review the status of certain of our other larger operators.

Let me turn to the operating environment we experienced during the quarter, and to set the stage, let me reference my comments of April 22nd, 2003, the time of our first quarter earnings call. I had made the observation that we were in a seller's market for health care real estate, not a buyer's market, which was being caused by, one, historic low interest rates and, two, the rotation of nontraditional real estate investors into our space. I also commented that our discipline would remain true to our investment triangle, particularly the philosophy of being opportunistic and that we would not chase cap rates in an environment we viewed as unsustainable. Our acquisition volume during the second quarter totaled $4.2 million. In fact, if you include properties that we sold or entered escrow into during the quarter, that total represented $20.5 million, significantly ahead of our volume of acquisitions for the quarter. During the quarter, we continue to strengthen our balance sheet, another point on our investment triangle, by selling equity and retiring an outstanding higher cost issue of preferred stock as well as reducing indebtedness on our bank line.

In addition, we created HCP Medical Office Portfolio, LLC, a $600 million joint venture with General Electric focused on acquiring medical office buildings. As we sit here today, that joint venture and the current availability on our bank line represent approximately $1 billion of dry powder, and that does not include any proceeds from additional property dispositions or return trips to issue either term debt or preferred stock in the capital markets.

Now, of what value is all that capital if we are in a sellers market? While it's too early to have developed a definitive view, it may well be that Mr. Greenspan's 0.25 point rate cut four weeks ago triggered not only a massive sell off in the bond market, which has seen a backup in the ten year treasury of 110 basis points in the last four weeks, but also represents an inflection point in the intent of sellers of health care real estate. Since the last week of June, our shadow list of activity is up fivefold, and better still, it is a higher quality of potential acquisition volume. Another data point, one month ago we were executing our confidentiality agreements at a rate of one per week. Today we are executing confidentiality agreements at a rate of one per day. Clearly, the environment is changing, and we could not be better positioned.

Let me now turn to progress on organizational related issues. First, we were pleased to welcome Dick Rosenberg, the long time successful CEO of Bank of America to our Board of directors in May. Dick's judgment, credit expertise, and experience in matters of corporate governments will be a huge plus for Health Care Property investors going forward. Secondly, also in May, we were delighted to welcome Talya Nevo-Hacohen as Senior Vice President, Strategic Development and Treasurer. Talya brings a wealth of real estate advisory and operating perspective following 20 years of professional service at Goldman Sachs and previously as an architect. In addition, we have just named a Vice President of Tax who joined following 19 years of public accounting, focused on REIT tax matters. A Vice President of Information Technology who had previously functioned as a senior MIS executive at a number of concerns. And we have recently made the decision to outsource our human resource function to an individual with a wealth of organizational and human resource experiences. With all these changes, I would note that our headcount remains unchanged since the beginning of the year, demonstrating that we have been very measured with our people moves. As the first 100 days of my being CEO of Health Care Property Investors comes to a close, I feel we've achieved a reasonable amount of progress in a relatively brief period of time.

Let me now close with some thoughts on the second half of 2003. First and most importantly, I would expect this to be a more active acquirer of health care real estate from now until year end than the level we realized in the first six months of this year. As I mentioned on my first quarter call, by design we were a little quiet as we focused on strengthening the balance sheet, adding new talent to the management team, and putting the GE joint venture in place. Fortunately for us, we were able to achieve a lot of our goals in an acquisition environment that we were very, very uncomfortable with in terms of valuation and quality of deal flow. That looks like it may be in the early stages of changing. Now let me turn the call over to Talya.

Thank you, Jay. First I would like to outline our joint venture with GE and then provide a summary of our recent capital markets activity. On June 2nd, we announced the formation of HCP Medical Office Portfolio, LLC, with our joint venture partner GE Commercial Finance. The venture's mandate is to acquire up to $600 million worth of medical office buildings in the United States. As of today, the venture has not yet acquired any properties.

The economics. We have a 33% interest in the joint venture, and in addition to our interest, we will also receive acquisitions and disposition fees as well as an annual asset management fee. We intend to lever the venture using up to 75% loan to value non-recourse mortgage debt, assuming that we are able to place this level of secured financing, our share of the equity in the venture will be approximately $50 million.

Investment criteria. The joint venture is targeting assets that are stabilized and located on or adjacent to the campuses of leading hospitals and their respective markets. Since the venture is not targeting development projects or turnaround situations, you may see us acquire those properties and offer them to the venture once the properties are stabilized. Our goal is to invest the capital within three years although we remain optimistic we will be able to do so sooner. We are excited about our new relationship with GE, who we see as a strategic partner as well as a financial partner.

Our capital markets update. Our objective in the second quarter was to access the capital markets on an opportunistic basis in order to, one, reduce our leverage at the parent company level in anticipation of the funding of our joint venture with GE, and, two, continue to lower our overall cost of capital. During the course of the second quarter, we raised $33.4 million through our drip at an average share price of $37.38 per share. We continue to sell shares through our drip program at a 2% discount to market. Year to date, we have raised $58.1 million through the drip. On May 2nd, we redeemed all of our existing 8.6% series-D preferred stock for approximately $99.4 million. Shortly after the close of the quarter, we announced a common stock offering of 1.4 million shares at a stock price of $41.50 per share. Our gross proceeds from the transaction were at $58.1 million.

Borrowings under our line were approximately $173.2 million at the end of the quarter and were further reduced by the subsequent equity offerings. As of today, we have approximately $91 million drawn onto our bank line at a rate just below 2%. We believe that these transactions strengthen our balance sheet and create financial capacity for further acquisitions that meet our criteria. I will now turn the call over to Jim Reynolds, our Chief Financial Officer, who will discuss our financial results for the quarter. Jim.

Thank you, Talya. Hello, everyone. Turning first to financial performance, as you know, we earned 89 cents per share in the quarter in FFO per share. That met the street consensus expectations, but it was a penny lower than the same quarter last year. Now, as many of you know, we had some outstanding acquisition and revenue growth late in 2002, and that would have caused our earnings to increase. Offsetting that, we had the issues that we fully discussed in the current earnings release and past releases about Centennial and Sun.

But much less understood at this point, I think, is how good a job we're doing in terms of financing long at good rates. And that's demonstrated by the lower levels of bank debt on an average basis, we had for the quarter, $140 million less of bank debt outstanding. So that cost us a couple pennies if you run through the computation, at the higher debt rates per long term debt or for common stock levels. Another factor that impacted the numbers was that a year ago we had a lease termination fee on an assisted living property that aggregated over $1 million. So a year ago, the 90 cent quarter in the second quarter was the best quarter for that year. And this year, we don't expect a repeat of that, and we expect our earnings to improve in the third and fourth quarters.

Turning to guidance, guidance remains unchanged at $3.51 to $3.59 per share for the year. One of the things that will impact us positively in the third quarter is we'll get some better internal growth comparisons versus a year ago, and we expect that to happen again in the first quarter of 2004. The improved earnings in the second half of the year will also be dependent upon higher levels of acquisitions than we achieved in the first half, and Jay has already discussed that. Finally, we think we're going to be able to pre-fund our outstanding preferred stock issues, in particular, the 134 million outstanding on the 8.7% coupon preferred is callable on September 30th of this year.

Now turning to our operator review and the hospital sector, first, Tenet health care, as we predicted, because of the outlier issues, our rent coverage would drop, and it has to 4.4 to 1. This is still a very excellent level. Rent from Tenet is basically flat. Tenet is facing a number of issues. They're in the news constantly. The SEC has a disclosure investigation going. The justice department is looking at Medicare fraud. There are shareholder class action suits, and the U.S. attorney is looking at physician relocation agreements here in California. So they're pretty much up to their neck in alligators. We think that those are more corporate level problems. When you look at our hospitals, we really have outstanding hospitals and some of the best hospitals within Tenet.

Turning to Health South, they had a very good conference call, where they made a number of disclosures just two weeks ago. It was very positive. They talked about 25% EBITDA margins in their inpatient rehab hospital portfolio, which is where our properties are located. They talked about $650 million in total EBITDA, which will support a significant amount of debt. Our discussions with Health South have been positive, particularly as respect to the strength in the inpatient rehab portfolio that we own and our rents are current. Notwithstanding all of that good news, we and our investors, I think, are likely to have an extended period of uncertainty with respect to Health South.

Turning to the nursing home portfolio, we have a complete write-up about our Centennial and Sun issues in the earnings release. I think it's important to note that Sun, we predicted an overall $700,000 negative from our past rents, and that will kick in in the third quarter. For the second quarter, we were actually receiving less rent because Sun wasn't paying us on the four properties that we lease directly to them. So the Sun rent reduction actually cost us $450,000 in the second quarter. Our cash flow coverage on the nursing home portfolio as a whole has dropped to 1.3 times, and that's primarily as a result of the Medicare cuts.

On the Medicare front, we have also got a lot of good news. The therapy caps have been delayed, and we now have a market basket and administrative increase that totals 6% and will kick in on October 1st. In the Medicaid area, we now are looking at a 5% increase in the Medicaid rate in Indiana. We were previously looking at a decrease of that level. That is our biggest state for nursing homes, and so we're very excited about that increase. In Texas, we have a 1.5% decrease although they did pass some tort reform, and that, I think, will be subject to an election confirmation. Overall, we are now looking at 2 to 2.5% increases on our Medicaid portfolio rates for our largest states where we do nursing home business.

Turning to assisted living and retirement, yesterday or the day before, Ameritus announced its acquisition of Alpara. We think this is a very positive development for Ameritus. The combined companies will have an opportunity to cut G&A and achieve cost savings in that manner. They will also benefit from the restructuring of the Alpara portfolio, which has been going on for some time now. With respect to American Retirement, one of our large customers, there is no change in our accounting with respect to ARC, and American Retirement continues to make great progress in their operations. We hope some of you will have time to listen in to their earnings release, which comes up in a few weeks, or review their 10Q, which will also be available then.

Finally, our managed medical office properties have done well this quarter. The internal growth was up about $500,000, and that is now up to a 93% occupancy, and we expect those kinds of increases to continue in the future. There's some good news there. Now back to you, Jay.

Thank you, Jim. Thank you, Talya. Let me just recap. In the first quarter of this year, we were basically playing a game of defense, dealing with Centennial, Sun, Health South, etc. The second quarter saw us playing a game of field position as we put in place people, fundraising, and strategic platforms that will accrue to the benefit of our shareholders in the coming year. Now I suspect it's time to play a little offense. We still have a lot to do.

As you've heard, there remain a couple of outstanding preferreds that we can grab later this year. In addition, our existing real estate portfolio will benefit greatly from an increased focus and an overlay of technology. These are benefits that will require us to invest now so as to receive pay back in 2004 and beyond. We thank you for your continued interest in Health Care Property investors, and at this point, we'd be delighted to take any questions.

Thank you. At this time, if you'd like to ask a question, please press star 1 on your touch tone telephone. We'll talk our first question today from A.J. Rice with Merrill Lynch.

Actually, it's Doug Simpson. Jay, I was wondering could you come down more on the acquisition environment and maybe just talk about what you're seeing from the long term care guys versus assisted living and the MOBs and are you hearing any interest on the part of hospitals in securing refinancing in any way?

Yeah. I would say the comments I made with respect to quantity, quality, and intensity of acquisition volume coming through our office here were not at all unique to any one of those sectors. They are across the board.

Have you seen any change in the willingness of nursing home operators? Have they been emboldened by the favorable reimbursement news over the last couple of months? Have their expectations changed at all?

We haven't seen that. The observation I will make is I would have thought we might have had opportunities, you know, kind of it would have been more first quarter oriented. That the in the context of an awful lot of uncertainties and frankly some negative vibes, I would have thought there might have been some more opportunities that presented themselves to us where we might have been able to move very, very aggressively. But, in fact, evaluations held. There's one situation, I think, that's out there that was agreed to during the quarter. One of our friendly competitors actually backed away from it, and then someone else stepped up. In fact, that was the transaction that went off at a valuation that was significantly higher than where we were. So we -- if anything, we're probably a little surprised there wasn't more of a deterioration in value. That said now, with what's going on with the cost of financing for everyone, I think it's fair to say that, you know, valuations in the second quarter probably, you know, at least near term anyway, probably peaked. So we're feeling pretty good about how we've chosen to deploy our capital, and we're feeling very good about what we've got in house that we're focused on right now.

Sure. One just clarification. You had mentioned earlier that one of the -- you were seeing some, I think you said, nontraditional real estate investors. And just to clarify, is that nontraditional health care real estate, or is that nontraditional real estate in general that are just coming into the market because they think it's attractive?

Nontraditional health care. Institutional investors that historically have played more in the office space, maybe in the retail space, things like that, that rotated into the health care space.

Okay. And then maybe just one data type question. Jim, the SAB-101 impact -- do you have that handy for the quarter?

No, I don't. I think there's 8 cents+, let’s see. In the first quarter, there were almost 9 cents, and it reverses in time -- most of it comes in in the second and third quarters. So it would be like 4 cents coming in in the second, 4 cents in the third, and maybe 1 cent in the fourth.

Okay. Kind of similar to '02, the seasonality there?

Correct.

Okay, great. Thank you.

We'll go next to Rob Stevenson with Morgan Stanley.

When you're sitting out there looking at the second half in terms of acquisitions, what are you guys sort of contemplating? Or what's built into the sort of 351 and 359 guidance at this point?

Acquisitions of quality properties at good prices.

But is that -- you know, is that 100 million -- said another way, is there anything else other than the acquisitions that would materially affect where you come in in that range? As you sit here today.

I think, Rob, that would be the main driver. Jim and Talya referenced a couple of preferreds, unless something were to change, that we would intend to grab. Those would probably be the two -- those are probably some improved -- I mean, the internal growth has been on the triple net side of our business. 80% of our business has been negative to date, and I do think we're going to get some better results in that area as well going forward.

Okay. And then, I mean, what are you looking at today to issue preferred at? I mean, I assume that you would wind up taking out the 134 million with another series of lower rated preferreds or just taking out some --

Yeah, I think it changes -- you know, it doesn't change as quickly as the bond market changes, but I think right now a reasonable new issue level, based on what we're hearing from the marketplace, is kind of 7% area.

Okay. And -- I mean, is there any more sort of common issuance that you guys are thinking at this point in the remainder of '03?

I wouldn't think so. Really, we had an opportunity to visit very substantively with each of the three rate agencies the first week of June, and we had taken them through a fair amount of detail our intent for the GE joint venture and how we were going to lever that venture at a higher level than we were prepared to do on our balance sheet. But we had always assumed our pro rata ownership share in the venture with respect to the debt we think about it as being on our balance sheet. So we committed to them that we would make a subsequent adjustment to have a slightly more conservative balance sheet to offset the slightly more leveraged nature of that venture. And the opportunity presented itself there on June 30th or July 1st, I forget which, and effectively what we've done is now pre-funded that.

So I guess were we to go through the entire $600 million GE joint venture in the second half of the year, Rob, I mean, that -- I would say that would be unlikely by the way, but that might be a scenario where -- you know, we made a commitment to the rate agencies which we intend to stand by to maintain our strong balance sheet and our ratings. We will protect that accordingly.

Is any of the 56 million that you put in the press release, is any of that in the JV, the GE JV or is that all basically just you guys?

All us guys.

And then lastly, you said that headcount was basically unchanged from the beginning of the year. What about sort of G&A?

Well, you'll see the G&A. The G&A has picked up for this year over last quarter -- or same quarter a year ago. You've got two things going on there. You do have some severance running through the G&A this year. You shouldn't expect to see that next year. And then you've also got the effect of some of the --

Some of the troubled operator issues and the legal costs related to them and so forth are also in the G&A line.

Is that still going to impact the second half of '03 here? Are you still going to see more of that coming in, or is that basically all behind us now on the G&A line item?

It's not going to completely shut down. I would hope it would be less. I'm not exactly current on the estimate of, you know, third quarter coming up versus the third quarter a year ago. But generally, those costs should be winding down over time now.

Okay. Do you have any sort of guidance as to where you think on a stabilized basis, where G&A should trend on a quarterly basis? Sort of rough run rate?

Again, we really don't. This doesn't exactly answer your question, Rob, but I’d observe -- I think you can see where we're going here, but we're putting platforms and people in place that's got significant scalability to them. For us to put on another chunk of assets with the tax professional, the MIS professional, or some of the other things we're putting in place, you know, we can amortize. That's probably a poor choice of words. But we can amortize those sorts of functions over a much larger base and put in place a number of things -- people, systems, what have you. The GE joint venture that now has got most of that -- we still have stuff to do. But we've got most of that behind us in the first of the year. That's what I refer to as playing field position. Now we're in a position to kind of scale the company and disproportionate ought to be dropping into FFO to meet our dividend growth expectations.

And then, lastly, do you guys plan to make any guidance comments on '04 in the third quarter call?

At the present time, no.

So it will be later in the year we'll wind up getting any of that sort of guidance from you guys?

At the earliest.

Okay. Thanks, guys.

We'll go next to Gary Taylor with Bank of America.

Operator, that person's a little faint.

Mr. Taylor, if you could pick up your hand set.

Sorry. Now can you hear me?

Yes.

On this JV with GE, how does the accounting work on that? Are we going to see that up in the revenue line or somewhere below that, I would assume? Once some of those acquisitions are made.

Well, you've got equity income -- we have another income line in our income statement. And so there's equity income with respect to partnership income.

Right.

And then there's acquisition fees and management fees, and that would also be in other income.

Okay. And then just help me. I guess I'm a little confused. I thought earlier in the year, given as much interest as there was in the medical office buildings and the appreciation you've had in your portfolio, you're actually looking maybe to pare down some of your medical office building exposure and kind of redeploy that capital. But now you've funded this joint venture to do more medical office building acquisitions. So can you reconcile that for me?

You shouldn't assume that we're done with respect to any medical office building dispositions. We are constantly going to be, you know, looking at our portfolio and assessing from a footprint standpoint and from some other efficiencies where we are, what we need to do, which might very well include some additions. Well, it will include some additions, but might well include now and going forward some deletions. That's an ongoing process. It's not a one-time event.

Why the -- if you look at the total pipeline, am I right to conclude that you’re focused more on the MOB sector, or is that incorrect?

That would be incorrect.

Okay. You know, because you're seeing competitors doing a lot in the skilled nursing space. So maybe just a couple comments on what you're seeing there and what your thoughts are going forward for skilled nursing.

Our -- go back and check the script in the first quarter. We've got four concentrations -- hospitals, nursing homes, medical office buildings, assisted living/retirement centers. They're all plus or minus 22, 23 24%. Remember, the investment triangle we set up has got being opportunistic at the top, being diversified in the lower left, and having a strong balance sheet in the lower right. Your question goes to the lower left point, the diversification. We are signed up for a plan to become even more diversified. We've got the four concentrations. We will continue to exist in those concentrations, and you should assume that we will be net acquirers of real estate in each of those four concentrations. That's not to say that we won't from time to time decide to part with some properties. But on a net basis we will be acquiring real estate in each of those four concentrations.

Okay.

That includes skilled nursing.

Okay. Finally, the Tenet rent on the quarter, that $13.9 million, could you just refresh us on the escalator agreements? Could that number still go down based on revenue levels at Tenet or have we hit kind of the bottom levels there?

This is Jim Reynolds. We're basically flat for the six months and for the quarter with Tenet. You know, we put out a prediction that, because of the outlier issues, we could see a $0.5 million reduction, but then there could be increases elsewhere to offset those. So we're expecting basically flat. Tenet is the company that primarily creates the SAB-101 gyrations that we don't record 8 or 9 cents of income in the first quarter and then we do record it in the second and third quarters and that's the way they're -- the contingent rent formula works through each year. But what we see right now is basically flat.

Okay. Thank you.

We'll go next to Scott Estes with Deutsche Bank.

Good morning, guys. Quick question here on the Tenet and the Health South properties. Have you seen any changes with the level of admissions to the properties, any kind of changes there? At the property level?

Well, with respect to Health South, we've commented on the occupancies, which have held up very nicely. With respect to Tenant, we have seen some of the outlier revenues drop. They had a voluntary agreement, but I haven't seen any diminution in occupancy levels.

Okay. Great. I had a question too on looking, I guess, at 2000 -- 2003. Is it fair to say this is kind of a cleanup year for going through the portfolio and looking at assets that might need an impairment charge on the way to moving those off the balance sheet? Is that kind of a fair statement?

I think that's -- I think there's a lot of truth in that. I think, as I said, on the first quarter call, we had spent -- we were going to be quiet, we were very specific. We were going to be quiet in the first half of the year. We wanted to go back in and take a look at things, take a look at our model, take a look at our organizational structure, where we made significant changes which have been detailed previously. Part of that was to look at the concentrations, look at the properties we had in each of those concentrations and be thoughtful as to where we wanted to take that. With that, I believe you'll probably see us sell more properties this year, you know, than you have historically. And quite frankly, maybe that you'll see us sell prospectively. But I think there's a fair amount of truth in that comment.

Okay. Have you had a chance at this point to pretty much, Jay, go through the entire portfolio and kind of figure out where you are on each individual asset, or, you know, are there still corners of the portfolio you really haven't had a chance to go into quite yet?

No. We've been through everything. We're now into implementation mode. I will say we're a little farther ahead in assisted living, MOB, and hospital land on implementation mode than we are on the SNIS. But we've got a game plan for each of those four sectors, and we're marching on it right now.

I had a question too on how you just go about splitting deal flow into the JV. Is it pretty much just a case that any MOB is going to be slated for the JV, or are there situations where you might want to take a particular deal yourself rather than JV it?

No. That's -- yeah. We -- good question. The spirit of this is we were looking around, and we wanted to have a little different model in that space. And part of it was a financial partner. And we were in the very fortunate position to have five or six folks, very high quality institutions, show up, knock on our door to try to do something there.

The thing that really put GE out from the rest of the pack was that they were not only a financial partner, but they were a strategic partner as well. They've got an enormous footprint in the health care space, most obviously with their medical technology business, the business that ran just previous to being named CEO of the entire company. They've also got a very significant health care financial services business, which was recently bolstered with the acquisition of Heller. So they've got access points and relationships into the entire non-profit system. They're the number one vendor to the non-profit hospital system in the country. So when we thought about what we wanted in a partner, they checked all the boxes.

They've got a few dollars in their pocketbook, but as important or more importantly, they've got a nice strategic footprint into health care. So with that -- and we know a hospital operator or two from the standpoint of our business, we decided that in the spirit of having a true partnership, what we'd do is have the venture be in a position to earn acquisition fees, but it was like there were going to be acquisition fees that flowed to both parties regardless of who actually sourced the deal. So that was very important to both our friends at GE as well as ourselves. We didn't want to have any disincentives to put one deal in or not put them all in or maybe take one good deal and put it someplace else. So you've got a true partnership at work there.

It's a two thirds, one third ownership split. The only other comment I would make is it may well be that development of sort of MOB investments, that is really not at the core of the criteria for the joint venture. So you could very well see us do things that are a little outside the box, the development of an MOB, as Talya mentioned, or maybe a turnaround MOB, something that needed to get leased up before it was stabilized. Were we to do either of those two things, you would see us do those on the parent company balance sheet. But other than that, the spirit of both organizations -- and Talya as well as our head of business development, Terry Lundberg, are driving that process internally. They were working with and having regular sessions with our friends at GE to drive flow into that joint venture, and everybody will benefit from that.

Okay.

We believe it's a very, very compelling offering to hospital administrators in terms of a medical office building financing platform.

Great. That's helpful. Thank you.

We'll go next to Jonathan Lid with Smith Barney.

Hi. It's Jordan Sadler here with Jon. Quick question regarding, I guess, transaction activity. Interested to know what cap rates are doing on a real time basis. Have they inched up a bit across the board? And specifically, that's generally. And then also specifically about the medical office, what sort of cap rates are you expecting to bring properties into the JV at?

Yeah. Well, we saw cap rates heading down, you know, up until -- it's really too early to -- I don't know if there's been a transaction that's cleared that was entered into and cleared. It probably hasn't been the case since the bond market did a 180 here. But clearly, in the first quarter and heading into the second quarter, really until the end of June, we saw cap rate compression. We viewed that as unsustainable. We think that investing in real estate is a long term proposition. We think it’s a liquid proposition. And we are just not going to be in a position and will not chase cap rates that we view as unsustainable. Again, too early to put a pin in it, but it feels like things are starting to swing back the other way. So hopefully we're in a position here to have this wave come right at us with the financing and the vehicles we've put in place over the last several months. So I guess the real answer to your question is check back with us next quarter. That's kind of what it feels like right now.

There's not sort of a target cap rate for the MOBs?

In the joint venture, we are targeting -- it's a pretty specific set of criteria. We're talking about stabilized medical office buildings that are either on the campus or adjacent to high quality leading market share hospitals in a particular metropolitan area. And the targeted cap rate is 9.25 for that joint venture.

Where would you say the current market is? If you had to just -- I mean, that could go back a few weeks.

If you go -- you take my comments for being maybe three or four weeks out of date. Think we were looking at properties, and we didn't look real hard, that transactions were actually clearing in the mid to high 7s back in the spring. And I think in one I think there was an instance where someone actually got into the high 6s, if you can believe that. That's okay. That will come back around. And we're not going to chase that.

I mean, so I guess -- could you bridge that -- I mean, is there any GE assumed or GE JV assumed acquisitions in your guidance at all yet?

We don't have any acquisition guidance with respect to our earnings per share guidance. We don't do that.

Okay. And could you maybe just characterize the nature of the asset management fees and acquisition fees in terms of purchase quantified?

We've elected not to do that at the present time. That's per an agreement between ourselves and General Electric. There will be acquisition fees which will be one time in nature ongoing asset management fees, and then disposition fees, which again, will be one time in nature.

Separately, moving on to Tenant, you have some leases maturing in the next 12 to 18 months or so, and they are purchase options. A couple questions on that. Are the purchase options fixed or fair market value? And then secondly, any indication as to whether they will look to release or purchase?

It's our expectation they will renew. We've had some conversations with them. As you know, they have renewed in the past. The purchase options are they're coming up on six properties are at fair market value. And the rent that they have on those properties is well below market. So we think it makes a lot of sense for them to continue to lease the facilities at below market rent.

And it is at a fair market value?

The purchase options are.

Okay. They are. And then lastly, Jim, I guess, just curious of the nature of that $2.8 million impairment losses on the assets sold during the quarter, and maybe as well the $11.7 million year to date on the 13 facilities. Are those all one particular or more nursing home sort of assets that were -- you know, had a lot of vacancy, or what is it?

Well, let's see. If you look at the price profile of what we have held for sale today, it looks a lot like what we've been selling. And that's of the 18 properties, there's 12 physician clinics, 5 nursing homes, and 1 larger medical office building. So what's happened is that we've put these properties up for sale. We've had an idea of what they were worth. We've exposed them in the marketplace. In some cases, we haven't elected to write them down earlier because, if we didn't get our price, we weren't going to do it. So as it gets to a point in time where we have a contract and it goes into escrow then we take the write-down. There's no write-down required unless you've definitively made the decision to sell the property. And in some cases, we've had gains. In fact, there were some gains this quarter.

Okay. Well, thank you. That will be all.

Next to Jerry Doctrow with Legg Mason.

A lot of things asked and answered. I want to circle back on a couple of specifics because I'm having a little trouble seeing how we get from where we are to your guidance. I think, Jay, you said you weren't going to comment on acquisition levels, but maybe if we could just run through some of the assumptions on the other pieces. I think you said no additional equity issuance, but I'm assuming there will be issuance on the drip. And maybe if you could just go through a little bit more clearly some of the preferred or capital markets transactions kind of between here and year end.

I think your assumption is right. The drip will likely continue.

And do you have an expected level? I mean, 25, 30 million a quarter? Is that --

Yeah. At least. It's been doing quite well. And then -- I mean, the two preferreds as you know are one’s at 7 and 7/8 and it’s $60 million. And the other preferred, which isn't yet redeemable but will be on September 30th, is 8.7%. I mean, if you took that out with the 7% preferred, you'd have a nice gain.

And that's the 160 or 130, you said?

Yes. $134 million.

And are those coupon rates, Jim, are those sort of the effective rates? Is it a little bit higher yet on the -- your actual accrual rate on those?

Yeah, those are the actual coupons. As you know, you have to pay issuance costs, and that's traditionally a little over 3%.

And are there any other significant sort of moving parts that I'm not thinking of, you know, other than the investment levels? These are the --

Well, the couple things I mentioned that might have an impact on third and fourth quarters is that Sun, the former Sun assets created a divot in the first quarter. It won't be as bad going forward. And there's also some other lower rents on some properties that were negative comparisons in the second quarter that won't be in the third. So I think we'll have better internal growth figures.

Okay. And those are pretty much all -- that was detailed on the Sun and Centennial? You had some stuff going from 520 a month to 550 a month. And another one going from 284,000 a month to like 400 a month. Are there others beyond those?

There was a hospital that we took lower market rent on and there was a lengthy discussion about it, I don't know, two, three, four quarters ago. That negative comparison on a quarter to quarter basis is about $500,000. So that's a nice improvement in the third quarter, not to have that continue in the numbers.

Okay. Great. Thanks.

We'll go next to Chris Pike with Wachovia Securities.

Good morning. Good afternoon. I just want to follow up on the acquisitions. Jay, maybe you can help me out here. I understand your position not to quantify numbers going forward, but would it be fair to assume that going back 90 days and then looking forward, directionally things are falling in place in terms of quantity? And yet maybe there's slippage from acquisitions that were planned to close in Q3 and maybe now are going to close in Q4. But from a forward four quarter basis, quantitatively they're still in line.

You shouldn't take the fact that the second quarter acquisition volume of 4.2, that was -- you know, that was by design. Nothing slipped from the second quarter to third quarter, third quarter to fourth quarter. We did not like the market in the first half of this year. So we made a conscious decision -- now, fortunately, it was at a time where, I think, you know, health care real estate values -- we'll go out a few more quarters and look back, and one could reasonably expect that that was the peak, at least near term. It was also the time where you had arguably the most attractive financing markets in the history of the capital market. So we weren't buying properties in that time frame. We were selling some properties. In fact, we were selling a multiple of properties we were buying, and that took care of the financing. That was not an accident. We were fortunate that all that occurred while we were somewhat distracted with internal issues, organizational and the like. We come out who we are right now.

If, in fact, our anecdotal evidence that we're seeing would suggest that things are a little bit above a wave starting to come. Look where we're now positioned. We have got an amazingly strong balance sheet with amazingly strong partner. And I wouldn't trade our position for anybody right now. This is -- we couldn't be more pleased with where we are, where we sit today.

Okay. So the compression and cap rates that you talked about before and now the subsequent inflection that anecdotally you're seeing, this is all going according to plan from -- once again, let's say we move the clock back 90 days ago. This is kind of what you saw happening on the horizon?

Yeah. It would be a misstatement to say that was our crystal ball. Our crystal ball isn't any better than anybody else. We can only react to what we're seeing day to day. We did not like that marketplace up until a month ago, we didn't feel comfortable from a valuation standpoint or the quality of stuff we're looking at. We weren't comfortable making investments on behalf of our shareholders. Don't take that to mean we've got this massive crystal ball that's got more precision to anybody else. We don't. We're just kind of reacting to the environment we're in, and we don't want to be beholden to a certain acquisition not for the year, which you then have to allocate for each quarter, and you get in a mode where, if you're not putting the money out for each quarter, you start to get anxious. You need to be, our view is that's not the right way to run a long term business.

And in terms of dispositions, you alluded to the point that we may see dispositions going forward, maybe even the upcoming quarter, at a greater level than even historically you folks conducted sales. Am I to assume that the guidance also includes that?

You mean our 351 to 359?

Yeah.

Our guidance includes everything that we're seeing as we sit here today. Absolutely correct.

Okay. And I guess just one little housekeeping issue. Jim, in terms of the mortgage notes payable, the average WAC or just the WAC on those, around 8.5%? Is that a good assumption?

Sounds a little high, but you might be right.

Okay. Thanks.

We'll go next to Rich Anderson with Maxcor Financial.

Thanks. Let's get back to guidance just quickly. On the low end, 351 number, does that assume some acquisitions in addition to what's already been made this year, or does that assume nothing happens between now and the end of the year? The low end of the range.

There would be a net acquisition increment above what's already happened this year to get to that number.

And I guess I'm curious as to why so adamantly you said unlikely that you would issue guidance for '04 next quarter considering I just looked at your press release from a year ago October and you did issue guidance for '03 at that point. I was wondering why the change in sort of disclosure strategy?

Well, I don't think it's anything. The reality is that towards the end of the year we go through a reasonably thoughtful planning exercise for the next year. The stark reality is that that exercise is not completed by October, and, you know, I think, it seems to us, the market ought to have the benefit of our best thinking, and that doesn't really start to come together as we roll up property by property and take a look at the business plan until later in the calendar year.

I don't know if this has been addressed, but I know there was some discussion about the Tenant health care expirations in the early to mid part of next year. Is there any chance that they would come back to you and try to renegotiate those rents downward despite the fact that they're already below market, considering what's going on with the company?

I can't speak for Tenant health care.

Okay. And last question is do you have a number for straight line rents for the quarter, for the MOB profile?

I'm sorry, Rich. For the MOBs? For straight line rents or -- straight line rents --

Total number, I guess.

Yes. Straight line rents through the six months is 1.7 million. Straight line rents at the end of the first quarter was 800.

Thank you very much.

We'll go next to Carrie Callahan (ph) with Goldman Sachs.

The question is on the long term care portfolio. You obviously had good leasing activity in releasing the Centennial and the Sun space. So maybe you could tell us a little bit about what the demand you're seeing in the long term care business is. And maybe related to that, what direction the rental rates on the new leases are going, perhaps even a couple other property types beyond just long term care as well.

Well, there was a tremendous amount of interest in -- I thought it was surprising. Even when it seemed like all the news was bad in the nursing home industry, there was a tremendous amount of interest in both the Centennial portfolio properties and the Sun portfolio. The direction of our leases on those portfolios and some of the others that we've reset to lower levels is going to be good increases over the next two to three years. I think we've commented that we're seeing improved operations in assisted living as well. There we have some improved pricing power on the part of the operators and some better occupancies. And that's improving their overall operations. So that should translate to higher rents for us as well.

Okay. Thanks.

Once again, press star 1 if you'd like to ask a question. We'll go next to Scott Estes with Deutsche Bank.

Yes, thank you. A follow up on the 9.25% cap rate hurdle for the GE joint venture, is that a GAAP number, or is that an initial cash yield?

It's NOI over purchase price.

Scott, by the way, it's a targeted cap rate.

That's great. Also, have I got this right, that August 19th is the notification date for Tenant on the six leases? Is that six months?

I think you've got that right.

Okay. I know this is highly unlikely given where the lease levels are but have you thought about what would happen if that, you know, dollar amount of capital and gain were to come back and just how that would be managed?

We've had some discussion about that. Again, I think Jim's characterized it accurately. We think that's a very low probability.

Okay.

But, yes, we've had some discussion about that.

Okay. And is that an all or nothing -- is it a blanket renewal for the six then?

No, it isn't. Each of the assets stands alone from the standpoint of renewal or purchase options.

Okay. That's it. Thank you.

We'll go next to Robert Belzer with Prudential Securities.

A few questions. First, I apologize if you went over this earlier. But just on the preferred stock, do you intend to replace all the retired preferred with a new issue, or may you look to issue a smaller amount?

Robert, I mean, I think we've talked about doing some of the preferred with a new preferred issue. That's one of our -- maybe one of -- front and center in our thinking right now. I wouldn't say it's absolutely going to happen that way. We're opportunistic, and we'll see how the market shakes out in the next few weeks.

And just moving on to the GE JV, are you currently considering selling any owned assets into the JV?

I believe Talya addressed that. There's a possibility for that to happen, but I think it would be a very low probability. I'd say the only possibility might well be were we to do a development project, we'd do that on our balance sheet because the criteria for the GE joint venture is such that we would not do development in that joint venture.

However, it may well be that, once a development project was completed and stabilized, we would certainly, you know, have the ability to offer that property to the joint venture. But I think it would be unlikely that you'll see us move any of our up and running MOBs that, as Jim mentioned, are performing ahead of plan with 93% average occupancy. I think it's unlikely you'll see any of those move into the current joint venture. That's really set up to be more of an acquisition platform for both parties.

Okay. Great. And then just I'm noticing in the assets held for sale discussion, that number went to 18 at the end of the first quarter, it was 11, and then you sold 5 facilities. What do you attribute the change in that number to?

Well, the larger number, in particular, is one medical office building is the big number. I think it's a $7 or $8 million asset. And it previously wasn't in the discontinued operations assets. Most of the other assets that are in that category are anywhere from $0.5 million asset to $2.5 million assets.

Okay. Great. And then moving on to a few operator questions, first, even though Health South put out new financial data, you elected to pass on updating the performance of this portfolio. Are you still that skeptical on the new information they put out or are you just being conservative on this?

Well, they've told us that we can't absolutely rely on it at this point, that they're not done with their forensic accounting. So I think it -- I don't think it's conservatism. I think it would be quite aggressive to go the other way.

Just one final question on Centennial. Do you have signed agreements in place with your Centennial investments?

We have signed agreements on the 11 that we've moved to other operators. The Centennial negotiation itself on the 8 properties is still in process, and we don't have a final from the bankruptcy court there yet.

And when do you expect them either bankruptcy approval or for them to come out of bankruptcy?

Well, I don't know when they'll be coming out. Our agreement is moving forward, and I expect something soon.

Okay. Great. That's all my questions today. Thanks.

At this time, we're standing by with no further questions. I'd like to turn the call back over to our speakers for any additional or closing comments.

It's Jay Flaherty. Thank you very much for your Interest and your attendance on the call today. Take care.

And this does conclude today's conference call. We thank everyone for joining us today. You may now disconnect.