Healthpeak Properties Inc (PEAK) 2003 Q4 法說會逐字稿

Good day and welcome, everyone, to the Health Care Investors fourth quarter 2003 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. James F. Flaherty, III. Please go ahead, sir.

Thank you, operator. Good morning and good afternoon, everyone.

This is Jay Flaherty, Chief Executive Officer of Health Care Property Investors and on behalf of the company, welcome to our fourth quarter 2003 earnings call.

It truly is good morning and good afternoon for us as we have a bicoastal delivery for you today as certain members of senior management are in New York City for a commitment to speak at an institutional investor conference tomorrow morning.

Joining me on the call today are our Chairman, Kenneth Roath; Executive Vice Presidents Jim Reynolds and Paul Gallagher; Senior Vice Presidents, Ed Henning, Talya Nevo-Hacohen and Steve Malbash; our Chief Accounting Officer, Mary Carter; and the Chief Executive Officer of our MedCap subsidiary, Chuck Elkin.

At this time, I would ask our general council, Ed Henning, to read the forward statement.

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 beliefs and best judgments 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 now turn the call back over to Jay.

Thank you, Ed.

The past 100 days or so have been unusually active, so I'd like to summarize our recent initiatives. Then, our Chief Financial Officer, Jim Reynolds, will take you through the financial results for the fourth quarter. I will then finish up with an outlook of the current quarter that we're in, as well as a discussion of future guidance.

Last night, HCP reported FFO per diluted share for the 2003 year of $3.28. This amount was net of 29 cents per share in charges relating to the three separate outstanding issues of preferred stock that we redeemed during the year. Adding back these charges results in an FFO of $3.57 per share for 2003.

Also this morning, HCP announced that Mark Wallace will become Senior Vice President and Chief Financial Officer effective March 15, 2004. Mark joins HCP from Tremont Corporation, where he most recently served as Executive Vice President and Chief Financial Officer for both the holding company and its principal operating subsidiary, Timet, both of which were publicly traded, New York Stock Exchange companies during his tenure.

Combined, Tremont's portfolio of companies had revenues in excess of $1.5 billion with interests in manufacturing, distribution, chemicals, insurance and real estate. During Mark's 11-year career at Tremont, he held the positions of Vice President Finance and Controller, Vice President Information technology, before being elevated to Executive Vice President and Chief Financial Officer in 2000. In addition, Mark enjoyed 11-year public accounting career with Arthur Andersen. Mark is a Certified Public Accountant and has completed the General Electric Six Sigma leadership program.

Let me now turn to the most recently completed quarter.

On October 2nd, the company and HCP Medical Office Portfolio, LLC, a joint venture with General Electric, completed the acquisition of MedCap Properties for $575 million. As we have previously reviewed this transaction on an earlier call, I will only add that we are thrilled with the partnership we have struck with Chuck Elkin, Tom Clarich (ph) and their team in Nashville and that the integration is progressing on schedule.

Last December, we issued $195 million of perpetual preferred stock at a dividend rate of 7.1%. This transaction was increased in size from $170 million owing to strong investor demand.

Last Tuesday, HCP Medical Office Portfolio, our GE joint venture, completed $288 million of mortgage financings on the MedCap portfolio. Approximately 88% of this financing is structured as assumable, individual property mortgages at a weighted average fixed rate of 5.57% for a term of just under nine years. HCP's 1/3 share of this financing results in $92 million of net proceeds.

Last Thursday, HCP's Board of Directors announced a 2-for-1 stock split and an increase in the quarterly common dividend from 83 cents a share to 83.5 cents per share, or an indicated annual dividend of $3.34 for 2004. This compares to the $3.32 paid during 2003.

As a brief digression, recall that on our January 2003 earnings call of one year ago, I announced that HCP's Board had made the decision to change the company's historical practice of increasing the dividend one penny per quarter to a practice of reviewing the dividend on an annual basis. I also mentioned that it was the objective of the Board to see the FFO payout ratio, which had risen to 95% for the year ended December 31, 2002, reduced to approximately 90% over the next several years. With the results announced this morning, our FFO payout ratio was reduced from its 2002 level of 95% to 93% for 2003.

Also, on our January call of a year ago, I indicated that management was committed to reducing the payout ratio while continuing to increase the dividend. Our 4.1% growth in FFO for 2003 and announced .6% increase in the dividend rate for 2004, represents progress toward this objective.

Additionally, HCP has made significant progress on what I will categorize as shareholder alignment. At HCP's Board meeting of last Wednesday, the company announced it had approved an amendment to the company's stockholders rights plan, its poison pill, that will cause the rights to expire next month. In addition, the Board approved amendments to the company's charter that would declassify its Board of Directors and provide for annual elections. This amendment will require stockholders' approval at this May's annual meeting.

Also, at its Board meeting last Wednesday, two new directors, Dave Henry and Joe Sullivan, were elected to the Board. Dave is Vice Chairman and Chief Investment Officer of Kimco Realty, a world class REIT in the retailing sector and a company whose business model I have long admired. Joe Sullivan is currently Chairman of the Board of advisors of Rand Health, a member of the Board of Directors of Amylin Pharmaceuticals, and previously Chairman and Chief Executive Officer of American Health Properties, which we acquired in 1999. With the additions of Dave and Joe, we have added significant health care and REIT experience to our Board of Directors.

Last, but not least, in the category of shareholder alignment, I have instituted a freeze on officer salaries for this year. By maintaining base compensation levels of 2003 for 2004 we are attempting to have management compensation more at risk and a function of company performance.

This decision is an outgrowth of my announcement of two months ago that, going forward, I have notified the compensation committee of our Board that I intend to take any bonus or long-term incentives in the form of common stock or the equivalent,and that I further intend to pay for resulting income tax liabilities on my restricted shares, as they vest, out of personal funds so as to retain 100% of vested shares.

In a nutshell, if shareholders win, management wins. But we do not want to be in a position where management wins and shareholders do not. Taken in their entirety, we believe these actions significantly realign management's interests with those of our shareholders.

At this point, let me turn the call over to Jim Reynolds. Jim?

Thank you, Jay.

In the fourth quarter we had 94 cents of FFO. This was up significantly from a year ago but it was impacted by a $3.5 million or a 5 cent reversal of tax accruals related to the American Health merger. Offsetting that amount were higher operating costs and G&A costs that wouldn't be expected to recur, including costs of carrying two asset management organizations, one in Nashville, and one here in Newport Beach; and severance costs related to that wind-down. Also, we have higher compensation cost levels.

Our FFO guidance will be discussed further by Jay. It is in the earnings release at $3.52 to $3.62 for the year 2004.

The significant transactions that impacted 2003, the fourth quarter, and will have a significant positive impact on 2004 are American Retirement and the MedCap transactions. Regarding American Retirement, you will recall that in September we purchased four outstanding CCRC facilities for $163 million. This allows ARC to pay off approximately $50 million of Med's debt at 19.5% and allowed to us realize that higher rate in property cost value. The amount of the loan going forward was $76 million and we moved the accrual rate up from 13.25% to 16.5%.

The one-time adjustments in the third quarter aggregated $4.7 million or 7 cents per share. The run rate at 16.5% added about 1 cent per share in the fourth quarter. As a result of that set of transactions with ARC, they wound up with a much improved balance sheet and a better income statement. This is being reflected in investor interest as their stock price has now moved up from the $3 level to $4.85 at yesterday's close.

On the GE joint venture and the MedCap transactions, you recall the joint venture was for approximately $460 million in assets, 1/3 ours and 2/3 GE's. NOI on that transaction is about 9.25% of acquisition price and we earned two significant fees: An acquisition fee paid at the -- when properties are acquired; and a management fee. The acquisition fee added approximately 2.5 cents in the fourth quarter and the management fee adds about 3 cents annually.

Turning to our internal existing operations and performance with the existing portfolio, Jay is going to talk about Tenant.

Health sales add some very positive announcements within the last couple of weeks. They announced that they've done a very significant transaction in terms of raising money and paying off unsecured bond holders. They are now current with all of their bond holders on principal and interest. They are current on our rents through January and their share prices moved from 9 cent (ph) level to $5.45.

Our triple net nonMOB portfolio, about 75% of our total business- recurring business, has turned positive in terms of same-store rent growth in the fourth quarter. You will recall that we had significant headline risk with Centennial and Sun late in 2002 and early in 2003. Those twin issues cost us on a year-over-year basis approximately $4 million or 6 cents per share and we wouldn't expect those kinds of problems to recur in 2004.

The same-store growth on the old HCPI MOB portfolio for the year was about $1.5 million or 2 cents per share with same-store occupancies at 94%. Our 88% occupancy on the new GE joint venture has the potential to improve.

Jay has already commented on some of our capital markets activity. I do want to reemphasize that the refinancing of our preferred stock over the course of the year has been a tremendous success.

We started with about $300 million in preferred outstanding at the beginning of the year with a dividend payment of just under $25 million. We finished the year with approximately the same amount outstanding but the preferred dividend payments are just over $21 million. That has been a tremendous success.

Our bank line is now down to $130 million at about 2%. There's a discussion in our earnings release about our dividend reinvestment program. We had significant issuances under that program in 2003 but, due to more restrictive policies, we anticipate much lower levels of stock issuance in that program in 2004.

On discontinued operations, we made great progress in the quarter, we sold a total of 12 facilities for $31 million. We now have only 9 facilities on the discontinued list, down from 16 last quarter, and of those 9 facilities, 4 of them are in escrow.

Turning to a couple of accounting issues, please remember that in the first quarter our result will be down because of the accounting for FAB 101. That's where last year we took in approximately 9 cents per share in the first quarter, but those have to be deferred until later quarters because of the accounting rules. So, we expect to be down again in the first quarter.

And finally, on the question of impairments, we took a $2 million reserve on a facility in the fourth quarter where we are not having great success in -- in filling it at profitable levels. The SEC does not agree with the NARY definition of FFO and has amended that. We have not adopted those amendments at this point and the application within the industry is -- is inconsistent at this time but we may change it in the future. For your benefit, we have full disclosure of the impairments issued in both directions in our earnings release.

Now, back to Jay.

Thanks, Jim.

Let me close with three observations. Observation No. 1: Our financial condition. In my earlier remarks, I noted the $195 million preferred raise of December and the $92 million of net proceeds from the MedCap mortgage realized last week.

Separately, we have been evaluating the potential disposition of a portfolio of 17 nonstrategic medical office buildings. At the present time, we are under contract with a perspective purchaser and his deposit has gone hard. We would expect the transaction to close prior to quarter end. If completed, proceeds would approximate $95 million and an additional $30 million of mortgage debt would be relieved from our balance sheet.

Taken together, the preferred stock issuance of December, the MedCap financing of last week, and these MOB disposition proceeds would reduce indebtedness on our outstanding half a billion dollar bank line to $90 million after payment of next month's quarterly dividend.

Additionally, owing to certain structural modifications we have made, we anticipate significantly lower equity issuance under HCP's drip program during 2004 as Jim has just eluded to. As of year-end 2003, our debt to market capitalization ratio had declined to 27.2% from the 33.6% level of a year earlier.

At the present time, HCP has the strongest financial position in the company's 19-year history. We would not anticipate a need to visit the equity capital markets during 2004 absent a material acquisition.

Observation 2: The credit quality of our real estate portfolio. We've got good news here and we've got bad news. The good news is the financial condition of our operators continues to improve. We would note raising rent coverages after reduction from management fees in our senior housing sector. In fact, close readers of our financial release will note a large decrease in the number of companies profiled in our selected operator section.

The bad news. The bad news is the financial condition of our operators continued to improve. As I have discussed previously, one irony of our business model is that when operators in our portfolio encounter specific challenges and issues, so-called headline risk can occur, which often will create temporary pressure on the market price of our company's securities. The flip side of this phenomenon is that this is often the very time where we can affect opportunistic investments on behalf of our shareholders.

We saw this in the case of American Retirement Corp., and, as a further illustration, last March, when Health South stock was trading at about 10 cents a share, we were actively attempting to acquire additional Health South real estate beyond our nine inpatient rehab hospitals. While we are unsuccessful in these efforts, the new management team at Health South has done an admirable job in stabilizing their company, and has Jim has indicated, the share price has risen significantly.

Tenant. Tenant continues to be a name in our portfolio that generates headline risk. Yesterday, the leading health care services research analysts put out a report saying, "Tenant remains a very controversial story as the company continues to be the subject of numerous regulatory inquiries." He goes on to say that "Tenant's ultimate earnings power is likely substantially greater than what it is currently being posted by the company and that there is no near-term sign of the troubles abating." This morning, it is being reported in today's "Wall Street Journal" that Tenant is considering the disposition of as many as 30 additional hospitals. So, Tenant remains a fluid situation, however, I would emphasize that our existing seven Tenant hospitals cover their rents at a ratio of 4.1 to 1.

3: The current environment in 2004 guidance. Each of the four sectors we have concentrations in: hospitals; nursing homes; medical office buildings; and assisted and retirement living, continue to experience strong demand for properties with full valuations, at least as measured by historical metrics. We continue to be very disciplined and remain true to our investment triangle approach, focusing whenever possible on a smaller number of larger-sized transactions and trying at all times avoid auction processes.

In addition, we are taking advantage of this strong demand for properties to cull our portfolio as the potential MOB disposition that I described earlier illustrates.

For 2004, we have established FFO guidance of $3.52 to $3.62 per fully diluted share of FFO. At the mid-point of $3.57 per share, consistent with the direction we gave on our third quarter earnings call, we have assumed no disposition activity and no acquisition volume except for the acquisition levels contractually committed to as of December 31, 2003. At the low end of our guidance of $3.52 of FFO per share, we have incorporated the potential impact of the MOB portfolio disposition occurring as of quarter-end, March 31, 2004, with a conservative reinvestment rate assumption.

We intend to update the 2004 guidance on a quarterly basis as acquisition and disposition activity takes place.

Those conclude our formal remarks. At this point, operator, we'd be delighted to open the conference call up and take any questions that there might be.

Thank you, sir.

If you would like to ask a question on today's call, you may do so by pressing star 1 on your touch-tone phone. Again, that is star 1 to ask a question.

If you are on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question.

We will pause a moment to assemble our roster. We will take our first question from A.J. Rice with Merrill Lynch.

Hello, everyone. A couple of quick questions.

First a very specific one. The acquisition fee income and the management fee income, does that flow through interest and other income line or is it coming in somewhere else?

Yes, it's in interest and other income.

Okay.

If I look at the operating expenses for medical office buildings and look at that as a percent of the rental income from MOBs, it seems to have ticked up in the fourth quarter there. Is there any dynamic going on that is behind that that maybe is worth talking about?

Well, with respect to MedCap, we've taken that organization and the part of it that is asset management would -- would be included in that number. And also there would be the double-up related to our own group here in Newport Beach, which hasn't wound down at the end of the year.

Okay. Is there any sense as to routing the severance costs and the two management companies through the numbers? How much that contributed to incremental costs in the fourth quarter that won't go forward on a run rate basis?

Roughly. Yeah, I talked about a couple of cents.

Okay. Okay. All right. Thanks a lot.

We'll take our next question from Jordan Sadler with Smith Barney.

Hey, it's John Litt here with Jordan Sadler.

A couple of questions. You had mentioned Tenant doing this asset sale program. Do you have an appetite to do more Tenant or are you basically maxed out on your Tenant exposure?

I mentioned there was a report in this morning's Journal suggesting that that might happen. As far as I'm aware, Tenant has not made any specific announcement about that.

What would your appetite be, is the question?

We have a voracious appetite for investments that create value for our shareholders. We remain resolute in our commitment to having a diversified portfolio, diversified by operator, by sector, by geography, and at the present time we'd we would have appetites to have incremental acquisitions with respect to Tenant.

It sounds like that would be a yes, you'd increase your exposure to them if the right opportunity presented itself?

I would agree with that statement.

You talked about the dispositions of the MOBs. Can you give us a sense of what kind of rates they're being sold at?

Not at the present time.

And --

When the transaction closes we will obviously provide all of that information.

And I think Jordan has some questions, as well.

Just a follow-up on that disposition of the nonstrategic MOBs. That was your characterization. What makes them nonstrategic? And what are current cap rates of similar type of assets being offered out there maybe that you could give some color on?

What makes them nonstrategic is the dynamics of that portfolio. For example, one of the properties, you got a lot of one-off properties. One is in Mineot, North Dakota, one in Morristown, New Jersey, one's in Verona, New Jersey, you've also got some clinics.

If you think back on the call that we had in the fourth quarter where we described the strategic -- our strategic interest, with respect to the MedCap portfolio, in addition to partnering up with -- in our view, the best -- the best management team in the medical office building sector, we were particularly intrigued with the notion of having concentrations across geographies in the United States that have very good demographics, the Sun belt, in particular. And having those concentrations of multiple medical office buildings clustered or on campus around very, very strong hospitals in the HCA chain. You will see the absolute opposite dynamics with respect to this portfolio. They're economically viable assets, but don't fit the geographic footprint.

And could you maybe talk about what maybe some of the assets are being offered at? You know, there's obviously some volume in terms of cap rates. Are they higher than sort of the 9 1/4 that you'd be able to buy -- like you guys bought the GE portfolio at?

Again, I think I'd like to withhold any discussion on cap rates and things like that until such time that we actually close that disposition.

Okay.

And I guess just going back to that G&A question. Jim, you said a couple of pennies going forward of that number was nonrecurring so -- so the run rate is now -- it looks to be about $7 million per quarter? Is that about right? Or $28 million in G&A next year? Am I doing the math wrong?

Well, I don't think you should take just one quarter.

Oh. Okay.

But I think, you know, there have been a lot of initiatives this year --

I'm just wondering where the couple of pennies comes off of it, is it the full year number, the $25 million you guys had in G&A, take it off of there or off of the $8.3 million, which was the quarterly number?

The 2.3 cents I was talking about was the quarterly amount.

Okay. So, if I take that off I get $7 million and then I get - when I annualize that I get 28 figures. You say that could be on the high side?

Yes.

Okay.

And then just lastly, just -- can you talk a little bit about the accrual reversal that you guys had in the fourth quarter? The 5 cents? Was that in your $3.25 to $3.57 guidance that you provided last quarter for the full year?

No it wasn't in the guidance.

Okay.

And I don't want to be specific about -- about the issue. It's a complicated tax-related issue at the time of the American Health merger and the time has passed when we could be liable for it now. So that's why it's being reversed at this point rather than some other time.

So, noncash, so, just taking your 94 cents it would probably be your FFO to be comparable to what my number was, apples to apples, would be 89 cents. Is that the right way to look at it?

Yes.

Okay. Thank you very much.

We'll take our next question from Jerry Doctrow with Legg Mason.

Good morning. One specific thing and then one more general one. On -- you have the number for Cap Ex for the quarter?

We disclosed it for the year, so it would be roughly -- $6.5 million for the year I assume it's roughly a fourth of that.

Okay. Okay.

And how about just acquisition environments generally out there? You know, my sense -- I think, Jay, you were saying that, you know, sort of its active or whatever. My sense is there are a lot of people chasing deals. Could you just give me a little more color on sort of what's out there maybe separately for MOBs and for senior housing properties.

Yeah, Chuck, do you want to speak to the MOB? I will circle back on the other sectors?

Yes, on the MOB sector there are -- there is opportunity out there. We're seeing several investment banks or operators that have held portfolios that are now looking at monetizing those portfolios.

A good example is one that's I got a call on this morning that's not public yet, but it's potentially $150 million portfolio. We've also seen last year we saw the Assention Healthcare monetize -- in two different transactions, monetized part of their portfolio. They have additional properties as well that we're expecting to come to market this year.

We're also seeing some activity in Texas with some of the other, larger portfolios there. And pretty much throughout the country, people are looking at monetizing their assets on the medical office building side. It's just a redeployment of their capital into their core business and freeing up some of their balance sheet.

And these are primarily then the not-for-profits? There is some corporate portfolios, but mostly the not-for-profits?

Yeah, for the majority. But I think there may be one or two for-profits out there, as well this year, but the majority is not for profit.

Okay. So that's MOB.

But Jerry, I'd point out, take a hypothetical $100 million portfolio purchase with our business model, and let me just distinguish between a hypothetical $100 million portfolio purchase of an MOB portfolio versus say something in senior housing with our GE joint venture structure, which will allow for 70% loan to value sorts of secured financings. $100 million purchase 70% loan to value. The need for for equity is 30. Our GE joint venture is owned 2/3 GE, 1/3 HCP. So in that scenario, if that ended up in the joint venture, we would actually only put out $10 million of equity.

Contrast with that, say a senior housing $100 million opportunity, be it in long-term care or -- or assisted living or retired living, where we're not going to do any secured financing, we will continue to finance at the holding company and there you'd actually be putting out $100 million of equity. So, I think it's important to differentiate between the sectors, which is, you know, a major part of why we've elected to have the mid-point of our guidance assume no acquisition volume given that we've got a number of different dynamics that may be somewhat unique to our company's business model.

Now, with respect to senior housing, we've had a couple transactions, bigger transactions, occur in the last quarter. One was the sale of Horizon Bay, one was the sale of Elder Trust. So, there's some activity there.

Then there's -- let's see,the hospital there haven't been a lot of transactions in the hospital sector. There continues to be -- at least on the part of REITs. For example, I think the Tenant disposition of 14 hospitals is very, very illustrative of what's going on there. In all instances, those 14 hospitals were snapped up by strategic buyers. Hospitals continue to have, you know, premium valuations and premium places and that's in part, why we're so excited about our -- the hospital component of our portfolio that continues to have unusually high coverage ratios. In many instances, the highest coverage ratios of any real estate in our portfolio.

So, that's a little bit about what's going on with hospitals, senior housing and then Chuck could address the...

And senior housing, I heard a GE person speak at a conference in Florida where it seemed to indicate they'd be looking to do senior housing in their joint ventures, as well. I sort of assumed that was with you guys, you don't anticipate doing any senior housing deals with GE that might make you more competitive with C&L or something like that?

Well, I -- let me make a couple of comments. As I understand it, GE has a very active program with senior housing, although I'm reasonably certain that tends to be more of a debt -- debt financing profile as opposed to an equity investment, which is what we're doing in the GE joint venture with respect to MOBs.

And then with respect to being competitive, just as a general comment, you shouldn't read into our being either more or less active with respect to investments as us being more or less competitive. You should read that that that we feel very good about our investment approach and our philosophy and when we like something, you know, we will -- we will pursue it aggressively. It's not a function of us being competitive or not being competitively. It's a by-design decision to either move forward with acquisition activity or in the case of this disposition, move forward to dispose of some assets.

Okay. And last one, if I -- if I could.

You put out this chart about, you know, investments in the quarter, $230 million and then you, sort of, summarized it with the pieces of the, you know, the MedCap acquisition. And I was wondering if maybe you can just -- I'm making sure -- I want to be sure that I reconcile that and also want to assume that if you get your $92 million sort of back outs on the debt side, is that essentially reducing your equity investment in that property?

Yeah, if you take the total dollar amount that went into the GE joint venture from the MedCap -- now, remember, not all the MedCap went into joint venture because we did -- we've got a development component and then we've got a separate partnership that we've got set up.

So, of the 575, 460 went into the GE joint venture. Against that, you had a 70% loan to value mortgage. So, the difference between 460 and 70% of the financing is the equity requirement. And net-net after the repayment of the mortgage proceeds, the -- the balance is -- would be 1/3 of that equity is what we actually have invested in -- in MedCap Properties via the GE joint venture, against which we earned the acquisition fee, which was booked in the fourth quarter and we have ongoing asset management fees that Jim has already spoken of.

Okay, okay, thanks.

We will take our next question from Rich Anderson of Maxcore Financial.

Thank you.

The American retirement number, you mentioned 7 cents -- I'm sorry, I missed what that was associated with?

Hi, Rich. That has to do with -- recall we were recording interest income at 13.25.

Okay. I thought that was --

At the time that transaction took place and we realized 19.5 in property on the $50 million repayment. So that is a catch-up in the third quarter. Or 7 cents of catch-up.

Okay. With regard to the -- the joint venture, how big can you see that getting?

Rich, the -- the joint venture was set up in June at $600 million. That represents total transaction value.

Didn't you say it could get larger than that?

Well, yes, in theory I guess it could get quite a bit larger. It's going to be a function of what Chuck and the team in Nashville assess as, you know, the perspective pipeline of good quality MOB acquisitions.

Right now we're, you know, we're starting to bump up against the stated size of 600 and depending on where Chuck and his team come out with some of these pipeline opportunities they're experiencing, we, in very short order, could very well be tapped out there. Were that to happen, I think you'd probably see the -- the size of that venture expanded by both parties.

Okay. The Tenant coverage you identified as 4.1 times in your seven assets. That's come down from over 5, I think, maybe a year ago. I could be slightly off on that.

You're absolutely right on that.

So, at what point do you start getting nervous, as you mentioned before, being interested in purchasing assets that are run by -- let by Tenant?

Again. Again, I would just -- I would just make the comment that initially, you know, we look at the real estate, we're not -- we're not putting any value on going concern or what we're paying for bricks and mortar. So, officially it's got to pass the test of is it really a good real estate investment. Which at a certain point, we're indifferent, as to which operator, assuming they're good quality operators, are actually operating. That's our first and probably most important test. We've got a lot of respect for the management team up at Tenant.

They've got an unusually large number of challenges in front of them right now. We've got a very, very good working relationship, a very good dialogue with them and again, I standby what I said. I think there may be an opportunity here for to us participate in -- in some program if, in fact, that's what Tenant decides it wants to do.

Okay.

And Rich, I would make a further comment that we realize that 4.1:1, notwithstanding the fact that came down from like a 5.1:1 number like 12 months ago. Those coverage ratios are materially higher than what you're seeing in, you know, for example, in the assisted living sector of our concentration.

Right. I'm just -- directionally it's not very good.

The other question I have is on -- on Kindred, your portfolio with Kindred, are you happy with how they're proceeding and would you have any appetite to expand your exposure to Kindred?

Well, Jim, let me -- let me kick the back end of that question to you. Let me just say, here again, this is yet another example of this phenomenon of when the -- the performance and the credit quality of our operators improve it's good news and bad news.

We've got a significant number of -- amount of our revenues coming from Kindred. They've gotten quite a basis stronger, their stock price has performed very, very well. That's the good news. The bad news is that the margin, they probably need companies like us a little less these days because they've got the ability to go out and to raise capital in their own right and, you know, not -- not -- not necessarily need health care REITs.

Jim, what would you add to that?

The only thing I would add is that we are talking to them about reshuffling a couple of investments and at the same time looking at more additional business with them, perhaps on the LTAC side.

Okay. And then my last question is for Jay.

What would you say the circumstances and the thought process were behind the CFO change?

Rich, I'd take you back to the January '03 discussion where we talked about some changes in the organizational structure and we talked about some additional things we wanted to add to the company.

With respect to Mark Wallace. We've got, as I think a number of you have seen, the press release of this morning, you can take a look at his background.

In addition to having very, very deep and long-standing, 11 years at some public companies and 11 years prior to that in public accounting, very, very deep and long standing accounting background, Mark also brings to the company a very, very significant skill set with respect to IT. And if you go back to my third quarter earnings call, we talked at that time about a technology initiative where we were going to begin the process of digitizing our portfolio during the fourth quarter.

We brought in a newly created position, Vice President of Information Systems, had that staffed up, have signed a contract with MRI and we are in the process of converting our entire real estate portfolio to MRI. We got a jump-start on that with the acquisition of MedCap because, to their credit, Chuck and Tom had already -- put their portfolio on that MRI system. So, I think that, you know, in -- increased focus on the accounting and the -- and the IT side are probably the first two things that jump to my mind.

Okay. I mean -- I would just comment that, you know, you have been clearly taking a more opportunistic approach to your business since you came and that's been good, but this one, in my mind, might be the most opportunistic step yet in your tenure. So I just look forward to getting to know Mr. Wallace. Thank you.

We're going to take our next question from Ali Whitman with Goldman Sachs.

Hi, it's actually Kerry Callahan in addition to Ali and Nora Creeden is here, as well.

Just, Jay, on your management team, you'll added a lot of senior level folks. Can you just comment on kind of where you are in the rollout of the management team? And then related to that, how you think about the capability of the team relative to your asset base and what it could be? And I'm kind of getting to the idea of how much leverage you have there?

Yeah. A couple of comments there. Thank you.

Changes to our management team -- our senior management team -- are now complete. Point 1. Point 2, it's important to note -- I -- I am very, very focused on head count. It's important to note that over the course of 2003, we entered 2003 with effectively five different satellites outside of Southern California. We had a one-person business development office in Dallas, Texas; a one-person business development office in Atlanta, Georgia; a one-person business development office in Boston, Massachusetts; a one-person office in Ohio; and we had outsourced our IR function to an individual in Virginia.

As we sit here today in January of 2004, those five functions and those five offices have been completely collapsed. As I look at our head count, "X" the MedCap addition in Nashville with Chuck and Tom, our head count in Southern California is actually down year-over-year from 49 to 47 people. So, I think it is correct to note the changes and the additions at senior management level. I think it's a -- not a comprehensive perspective to not take into account the entire picture.

Turning to the third question you asked, Kerry, I think we now have, with one exception, an infrastructure that is extremely scalable. The one exception is -- and we're getting there -- is that we're not quite completed in the technology conversion of our real estate portfolio. We have teams of people working very hard on -- on digitizing that portfolio.

Our best guess, and that's all it is right now, this is the first time we've untaken, this is around the time of our annual meeting before we have that truly up and running and have information literally at our fingertips about our real estate portfolio that will enable us to make better decisions.

But with that piece of the puzzle in place, with the additions of Talya, you can see the level of capital markets activity that's gone on since her arrival here, at a gross level over a billion dollars in the last nine months. With Paul Gallagher joining with a focus on asset management. To the existing executive team of Ed Henning as General Counsel and Steve Malbash as head of property acquisitions and dispositions.

With Mark's joining as the CFO and with Jim continuing to evaluate an opportunity here with the company, we've got a, you know, very formidable management team. And I would underscore the fact that it is -- it is quite scalable in terms of a significant level of incremental property acquisitions, not requiring additional members of senior management. And I would point out, given my comments on the financial condition of the company, we have the balance sheet to execute such a strategy right now.

Okay, thanks, Jay. And then a question for Jim, if I could.

On the drip, I think you indicated, Jim, that the requirements are changing in '04 and therefore the drip would be less active. Can you just comment on exactly where the changes are and how that works?

I want to say a lot more than what was in the press release, but there were some, I guess short-term traders coming in on the -- the monthly -- to come in for 10,000 on accounts and they were managing several accounts. So, the new rules are more restrictive. We've also reduced the discount from 2% to 1%.

I think if you look at the disclosure, you can tell that there was about $25 million raised last year, just with respect to the nonmonthly 10,000 that the -- the real dividend reinvestment part of it.

Sorry, you said $25 million was for what period?

For a full year, I am sorry.

Full year. Okay. And you don't have any sense of how that's going to change in '04 yet?

Well, we really don't. Because I mean there are two things. I'm not sure what the discount impact that is going to have and we have given you some indication that the -- the monthly has dropped way off.

Yeah, I think -- didn't -- don't we have one month of actual here, December?

Yeah, it's like 240,000.

And that would just -- as a benchmark comparison would compare to what for say the average or the previous 11 months? Do you have that handy?

No, just less than $9 million.

Yeah, I mean so that's the point. $9 million, if I got that right, I apologize, we're in different locations this morning, or this afternoon. $9 million on a monthly run rate potentially dropping to $200,000, it's dropping off the cliff.

Yep.

Okay. Thank you.

We will take our next question from a follow-up from Jordan Sadler.

Hi, guys. Just -- I may have missed this, what was the reason for the missed relevance to your previous expectations from last quarter?

I would just say it's the higher levels of G&A and operating costs and the couple of cents of -- of nonrecurring items that I talked about.

Okay. So, was there more severance that you hadn't anticipated?

Let me make this comment. 2003, it's a little -- you got a lot going on in 2003 in fairness to -- to my colleagues. You had the Centennial and Sun rent reductions. You had, as I've indicated with the deployment of professional people, you had an awful lot of severance. You had more severance in 2003 than in the entire history of the company.

You had a duplicative MOB asset function for just a couple of months. That was by design. We wanted to make sure there were no bumps in the road in terms of integration of the MedCap partnership.

We had the retirement of our founder and CEO and some costs related to that. We got the technology initiative that we talked about. And then, you know, the bottom, bottom, bottom line is the preponderance of that acquisition volume was all back-ended into the fourth quarter. So, you got a lot of things going on there that again, it -- I think you need to take into account when you try to get a run rate going forward.

Okay. Thanks.

Once again that is star 1 to ask a question. Again, that is star 1 to ask a question.

We will take our next question from Scott O'Shea with Deutsche Banc.

Yes, thank you. Quick question on the distribution policy out of the MedCap portfolio.

I think there was a number, 4,678 million. Are those funds being received on a quarterly basis or are you getting cash out monthly? Or could you just comment on what the policy is out of the JV?

Quarterly, Scott.

Okay. Okay.

The next question relates to the lease rollover for 2004. I know it's pretty low at just 2.5%, but is -- does that include the -- the one Tenant facility? Are there any concerns that the leases are above market or they, you know, essentially at market or below market?

It does include the Tenant facility which, you know, we don't have any concerns about. The remaining group is a mixed bag so, yeah, there would be some minor resets lower.

Okay. So, does it average a little bit lower or they just kind of offset one another?

Probably average a little bit lower.

Okay. Okay. And finally, on the American Health Properties accrual reversal, is that an interest in other income? The 14,583 million, that includes the 3.4 million accrual?

Yes.

That's it. That's great. Thank you very much.

Mr. Flaherty, there appears to be no further questions at this time. I'd like to turn the call back over to you, sir.

Okay, thank you, operator. Thank you to everyone for participating in the call and we look forward to talking with you and speaking with you soon. Thank you.

And this does conclude today's conference call. At this time, you may disconnect.